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Client Conversations: Is Bitcoin the Biggest Boom— or Bubble—Ever?

January 2018

Bitcoin is currently at the forefront of a heightened interest in all forms of digital currency.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


Fiction writers couldn’t make the Bitcoin story any more fascinating if they tried. A mysterious (and still unidentified) founder. An intriguing (and complex) purchasing process. A hype leading to a market trend (or mania) on a level not seen in years. Yet, despite this rabid global excitement for Bitcoin, many still aren’t familiar with this digital payment system and why it recently became an extremely popular investment.

 

What are bitcoins?

Bitcoin is a brand of encrypted electronic cash you can’t put into the wallet in your back pocket or purse—since there are no physical bills or coins to hold. A bitcoin conceptually acts like a dollar, but with some key differences.

You can hypothetically exchange it for goods and services if someone accepts it as a form of payment. However, unlike traditional currency, Bitcoin, and its digital brethren, is neither issued nor controlled by a government or a central bank. It runs on a decentralized network that no single institution controls. This initially gave Bitcoin its greatest appeal for some—the ability to send and receive payments anonymously.

 

Why Bitcoin?

It was the first peer-to-peer virtual currency system, meaning that there is no third party facilitating the exchange between the two individuals in a transaction. This was important in the beginning when its main appeal for some could have been its use in black market trade. Yes, there are other digital currencies (see “The Rivals” sidebar) currently on the market, but Bitcoin has gotten the most headlines because of a staggering increases in its price.

 

When did Bitcoin explode?

Despite existing virtually, the impact it’s had on the investing world has been quite tangible since its introduction in 2009. After several years of ups and downs, Bitcoin really took off in 2017. It saw a staggering increase in value as investors took notice and prices skyrocketed.

 

Figure 1 
The Price of Bitcoin Skyrocketed in 2017

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Source: Blockchain.info, 12/31/17. Past performance is not a guarantee of future results. 

 

How do you buy a bitcoin?

A number of exchanges exist around the world to help facilitate the buying and selling of bitcoins. But not everyone pays the current exchange rate to acquire their bitcoins. Unlike the US Treasury printing money when it wants to put more into circulation, Bitcoin mining creates additional units as rewards for those who keep the network of bitcoin transactions running smoothly.

Mining is done through a network of user computers running special software. It’s not something an average person would ever undertake. But the business is big. Every 10 minutes, it’s currently estimated that 12.5 bitcoins are released to those hardworking folks.1

No matter how they’re acquired, a majority of bitcoins are in the hands of a small group of investors. It’s believed 40 percent are held by about 1,000 people.2

 

What's not to like about Bitcoin?

Uncertainty. The roller coaster ride could just as easily take passengers in the opposite direction: straight down. Digital currencies lack certain regulations that securities have in place. And unlike assets placed into a bank account, bitcoins are not FDIC insured. Even tougher to swallow—if codes are lost or stolen, those bitcoins will not be accessible by their rightful owner, and therefore are gone forever.

In addition, competitors are introducing alternatives that are positioning themselves to the Bitcoin community as better because they are faster and offer cheaper transaction fees. The popularity may soon spread out into a number of rivals.

 

What’s the future of Bitcoin?

Where will the Bitcoin story go from here? No one can agree on what we’re seeing. Nevertheless, institutional investors, hedge fund managers, and some of your neighbors are jumping into buying digital currencies. And the US federal government may be next.

The US Federal Reserve could get into the digital money business with its own to attempt to gain control in this area the same way it does with the traditional money supply. At the very least, you may possibly see heavier regulation of this market in the near future.

Time will tell if Bitcoin is one of the biggest bubbles in history or the beginning of an important currency revolution. Talk to your financial advisor about the pros and cons of Bitcoin before putting bitcoins in your virtual wallet.

The Rivals

Bitcoin may be popular, but it’s not alone. Thousands of competitors—the biggest being Ethereum, Bitcoin Cash, Litecoin, Ripple, and Zcash—are competing to take some of the spotlight. Each of them operates a little differently—but all share the similarity that they only exist digitally. Many have also hit record highs in recent days, too. Litecoin saw a nearly 5,800% increase since the beginning of the 2017.3

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


1 Source: “How Many Barrels Of Oil Are Needed To Mine One Bitcoin?” Huffington Post, 10/27/17
2 Source: “The Bitcoin Whales: 1,000 People Who Own 40 Percent of the Market,” Bloomberg Business Week, 12/8/17
3 Source: “Forget Bitcoin, Its Fourth-Biggest Rival Is Up Nearly 5,800 Percent This Year,” CNBC, 12/12/17

All investments are subject to risk, including the possible loss of principal.

This material is provided for educational purposes only.

This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

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