Investing in Bitcoin
By Hillary Sunderland, CFA, CKA
Cryptocurrencies continue to be a hot topic in the media. After a meteoric rise in 2017, the most popular of these —Bitcoin has lost about 50% of its value this year since hitting its high in January. The extreme volatility has left many investors wondering what the cryptocurrency craze is all about and whether they should get on board while prices are still down. Let’s take a brief look into Bitcoin to gain some perspective.
What is Bitcoin?
Bitcoin is a digital currency that allows online payments to be made directly from one party to another through a worldwide digital payment network known as the blockchain. The blockchain is supported by Bitcoin “miners” who use computers to solve cryptographic puzzles. The miners are awarded with new Bitcoins when they solve these puzzles, and they also secure and verify Bitcoin transactions from one user to another on a decentralized network by validating and timestamping transactions to the blockchain. On the blockchain, records are held and distributed on a public ledger without the need of a centralized, third-party intermediary such as a bank. This, as the term “crypto” implies, allows the transactions to occur completely anonymously.
Bitcoin, as an unregulated digital currency that lacks the consumer protections of legal-tender currencies, is an extremely volatile and speculative investment. While the Commodity Futures Trading Commission has regulated futures contracts on Bitcoin, the Bitcoin itself (cash market) is not regulated, and the Securities & Exchange Commission has denied the registration of ETFs that invest in cryptocurrencies. Similar to gold, Bitcoin doesn’t have earnings or revenues, so traditional valuation metrics such as price-to-earnings ratios don’t apply. However, unlike gold, Bitcoin is not used in the production of any goods, which makes its value even more difficult to assess. The total supply of Bitcoin is claimed by its mysterious creators (group of unidentified people collectively known as Satoshi Nakamoto) to be fixed at a maximum of 21 million coins in an effort to ensure sufficient value. But overall, its price is driven primarily by supply and demand factors and public faith in Bitcoin as a means of payment. Bitcoin has been particularly attractive to those that have lost faith in government currencies and/or want their transactions to occur anonymously. However, others have jumped onboard as cryptocurrencies have received more and more mainstream media coverage.
Is Investing in Bitcoin Responsible?
One of the aspects of Bitcoin that is of particular interest to us is whether or not we can view Bitcoin as a biblically responsible investment. While the underlying blockchain technology is appealing and has some potentially great applications, there are some unique aspects of Bitcoin that investors should consider. For starters, one of the most appealing aspects of Bitcoin to users is the ability to conduct transactions completely anonymously. Because of this, Bitcoin has become the currency of choice for organized crime, the drug trade and for other illicit activities online – including the sex trafficking of minors. While owners of Bitcoin aren’t profiting from this in the traditional sense, it still something to consider. Further, we cannot identify any redemptive purpose for Bitcoin or other cryptocurrencies; therefore making it more akin to gambling than a legitimate investment opportunity. Some might even suggest that the advent of cryptocurrencies is the first step in the move towards a One-world currency alluded to in scripture (Revelation 13: 16-17).
Finally, Bitcoin mining is intentionally designed to be resource-intensive and difficult so that the number of blocks mined each day remains steady over time, producing a controlled, finite monetary supply. The proof-of-work required by Bitcoin to avoid double-spending of the digital currency has led to enormous electricity usage. A recent study estimates that the Bitcoin network alone currently consumes at least 2.55 gigawatts (GW) of electricity per day, making it comparable with the electricity consumption of the country of Ireland, which consumes 3.1 GW of electricity. This is quite astounding – especially given that Bitcoin is just one of many cryptocurrencies. One should at least question whether it is wise to use the resources we’ve been entrusted with for this purpose.
Overall, given the regulatory concerns surrounding cryptocurrencies; the volatility that one assumes by purchasing Bitcoin; its nefarious origins and shaky ground as a responsible investment, we take the position that Bitcoin is more of a speculation than it is an investment and should therefore be avoided. The bible has clear warnings on this front. “Steady plodding brings prosperity; hasty speculation brings poverty.” ~ Proverbs 21:5
Financial Planning & Investment Advisory services offered through Beacon Wealth Consultants, Inc.