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Is Bitcoin a Good Investment?

Is Bitcoin a good investment? It is the new frontier in the investment world.  Its gains over the past six years will catch your eye.  Today we will answer a listener question about the digital currency and its characteristics.

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Is Bitcoin a Good Investment?

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Is bitcoin a good investment

Our question is from Chris. He writes, “A guy at work keeps talking about Bitcoin. I don’t understand it. What is it and should I consider investing in it?”

Bitcoin, along with a few others, is a digital currency. It is not backed by a country or a central bank. An encrypted public ledger verifies the ownership of the coins. This ledger uses blockchain technology and it is very difficult to change. There are people who use computers to verify the transactions using digital cryptographic keys.

Bitcoin and Gold

In many ways, Bitcoin is similar to an investment in gold.

  • You can buy in various currencies, just like gold.
  • Its price fluctuates with changes in demand, just like gold.
  • And it is used as a store of value, just like gold.

But it is also different. Most businesses do not accept gold as a form of payment. You can use Bitcoin and other digital currencies to buy and sell goods and services. You can use it on PayPal. Some online retailers will also accept it for payment.

Growing Popularity

Bitcoin has become very popular to investors for a couple of reasons. The first is its meteoric gains over the last several years. It started trading in mid-September 2014. The price then was about $460. Last week, it closed at over $18,800. The average annual return of the Bitcoin has been about 82% per year.

The other appealing aspect of Bitcoin is that it is not a government-controlled currency.

Caution: Proceed with Care

There are many concerns when investing in Bitcoin.

Volatility

Bitcoin began trading in September 2014. Since then, we have seen

  • one price drop of more than 80%
  • another price drop of nearly 60%
  • three more drops of more than 30%
  • and three more drops of at least 20%.

This equates to eight bear markets in six years. It can be a very wild ride—more so than stocks and gold!

Taxes

There are tax consequences to sell your coins. Those sales get taxed as capital gains and losses. You need to be aware of your holding periods to know whether it’s short term or long term.

Are Purchases Considered Redemptions?

If you are using your Bitcoins to buy something, is that considered a redemption? This is a vague area. In some cases, using your digital currency as payment is considered a redemption. This could create a taxable event you did not expect.

Fees

There are some transaction fees to buy and sell Bitcoin. You want to be aware of those.

Non-traditional Businesses

You cannot buy cryptocurrency through most traditional financial institutions. Major brokerage firms and banks won’t hold or execute the trades.

The “Wild West” of Finance

Many governments fear criminals use Bitcoin to launder money. The United States asks if you have a cryptocurrency account on your tax return. They ask to help them track potential criminal activity.

Security of your account is also a concern. It’s a new frontier with very little regulation. There are many concerns about the security of your digital key and avoiding hackers.

Your digital key is very important. Recently, a CEO from a cryptocurrency exchange died with his passwords. He had over $150 million tied up in cryptocurrency. His family cannot access those accounts without the digital keys.

How do You Buy It? (My Own Experience)

The first thing you need to have is a digital wallet. There are many well-known providers. I used Coinbase. I opened an account in less than 10 minutes. I had a little difficulty linking it to one of the banks I deal with, but I was able to fix the issue.

Coinbase charges a minimum transaction fee of $2.99. The costs are then about 1.5% of the amount you buy or sell.

Overall, the process was very easy.

If you want to use a brokerage firm, try Betterment or Robinhood.

Is Bitcoin a Good Investment?

It has been terrific if (and that is a big “IF“) you can withstand the volatility. But nobody knows how it will do in the future. Right now, it is near its all-time high. You could be buying high, hoping it goes higher. You may want to wait for a correction—it tends to correct frequently. And there are tax consequences when you sell your coins.

You need to be careful and make sure you have your strong passwords written down somewhere. If something happens to you, your loved ones can access that account. 

Blockchain

Blockchain technology has a lot of potential uses in many different industries.

  • you could use it to verify your title to real estate
  • governments could use it for online voting security
  • Stock exchanges can use it to verify ownership of stock certificates. This could speed up trade settlements
  • companies like FedEx and UPS can use it to verify their deliveries
  • the Certified Financial Planner Board of Standards is already using blockchain to authenticate credentials

Bitcoin is a new frontier in the investing world. If you would like to learn more or get an objective opinion about how cryptocurrency could fit into your plan, check with a financial planner.

Talk to a Certified Financial Planner™ Professional

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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