What Got Me Interested in Bitcoin

May 02, 2022
By Kristan Anderson, CEBS®, CFP® | Dir. of Retirement Plan Services & Dir. of Financial Planning
Woman holding coin. West Financial Services.

I recently attended a Fidelity sponsored webinar in which they presented their new whitepaper on bitcoin. In general, I’m skeptical of digital assets such as bitcoin and other digital currencies, as well as Non-fungible tokens (NFTs) and the like. There isn’t a lot of history to determine the risk/reward tradeoff and the relative lack of regulation is concerning. Exchanges have been hacked, users have lost their digital wallet (resulting in loss of all of their bitcoin) and the anonymity of network users can lead to illegal transactions. But what this webinar and whitepaper presented made an appealing case for investing in bitcoin, specifically, as an alternative monetary asset.

But first, we should discuss what bitcoin is, and what it represents. Bitcoin (capital “B”) refers to the network on which bitcoin, the token or asset, resides. As a payment system, Bitcoin is just a code that allows users to transfer the digital token known as bitcoin. This being the first digital payment system of its kind, there were bound to be competitors over time. The whitepaper addresses why bitcoin is a superior monetary good than other digital currencies and other monetary goods, such as gold and fiat currency.

The most compelling argument for bitcoin’s value as a monetary asset is its scarcity. There is, and most likely will continue to be, only 21 million bitcoins. Because of the network’s decentralization and the hard coded supply cap, the amount of bitcoin should remain consistent. There isn’t any incentive for any network participant to suggest otherwise.

While there are competitors to Bitcoin, Fidelity’s research suggests that the network effectively addresses the blockchain trilemma that, “a decentralized database…can only deliver on two of three guarantees at one time: decentralization, security, or scalability.” In short, the network is the most decentralized and secure, for which it suffers in terms of scalability and speed of transactions.

I still have concerns over the environmental impact of cryptocurrencies, in general. Bitcoin mining is the process by which a miner uses ever increasing computational power to create new digital coins. A recent PC Magazine article discusses the fact that Bitcoin mining uses a tremendous amount of energy and creates a lot of electronic waste. Specifically, the article states that, “a single Bitcoin transaction is estimated to burn 2292.5 kilowatt hours of electricity, enough to power a typical U.S. household for over 78 days.” While there are efforts to make crypto mining more energy efficient, these initiatives will take time and coordination to show results. 

As an investment, bitcoin seems to fall into the same category as gold. It is not a company that has its own cash flows or pays a dividend. Its value is wholly dependent on what network users are willing to pay for it. In this sense, you are buying into the wisdom of the masses, who may or may not fully understand the investment they are making. However, as the whitepaper points out, every day that Bitcoin survives increases its viability as a future monetary good. In that sense, including a reasonable investment in bitcoin as an alternative asset may make some sense, if you can stomach the current volatility and environmental concerns.

Please note that the above observations are just that, and they do not constitute any recommendation for investment in bitcoin. As more clients come to us with digital assets in their portfolio, we continue to research and refine our approach and recommendations toward this new and developing asset class.

Meet Kristan Anderson, CEBS®, CFP® | Dir. of Retirement Plan Services & Dir. of Financial Planning »


Sources:

https://www.fidelitydigitalassets.com/articles/bitcoin-first.
https://www.pcmag.com/how-to/what-is-the-environmental-impact-of-cryptocurrency#:~:text=The%20environmental%20concern%20comes%20from,household%20for%20over%2078%20days.

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