Three (bit)coins in the fountain…
Published: January 12, 2018
It’s difficult to get through a day without hearing a mention of Bitcoin or, increasingly, other cryptocurrencies. From Bitcoin’s understated introduction in 2009, by the mysterious Satoshi Nakamoto, to today, the cryptocurrency market has grown exponentially.
What is a cryptocurrency?
Oxford Dictionary defines cryptocurrency as: “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
To paraphrase in simpler language, a cryptocurrency is a currency which:
- Exists only online
- Uses sophisticated coding to provide transaction security
- Is not regulated by a country’s or region/zone’s central bank
Beginning in about 2013, interest in digital currencies really took off. The reasons include speculative demand and limited supply, growing acceptance for transactions and the development of related financial markets. Certain retailers, such as Overstock.com and Microsoft.com, began accepting Bitcoin as payment. There are now hundreds of retailers that accept Bitcoin: 1-800 Flowers, Amazon, Apple App Store, Bloomberg, CVS, Etsy, Home Depot, Kmart, Paypal, Sears, Subway, Zappos, to list a few.
Since the start of 2013, when it was around US$14, the price of one Bitcoin has risen astronomically, recently trading at US$14,000.
Back to Fundamentals
It’s always tempting, of course, when you see something going on like the Bitcoin phenomenon, to get caught up in the excitement and want to be part of it. At Klingenstein Fields Advisors we are not currently buying Bitcoin or other cryptocurrencies for our clients. However, we are constantly looking at markets and your portfolio to evaluate potential opportunities for investment. We aim to look beyond the noise and the hype, applying a disciplined approach to asset allocation, diversification and investment selection. Some of the questions we ask are:
- Does the potential investment represent a long-term shift in the market or short-term noise?
- Are current valuations supported by meaningful fundamental factors?
- What are the foreseeable risks and what other risks could arise?
- Does the potential exist for a short-term tactical shift, with benefits that exceed the cost of trading?
- If we are fully invested, does the new opportunity represent more attractive return potential than current holdings?
- If we have cash, are there other opportunities that we believe possess greater upside potential?
- Is the potential investment aligned with your asset allocation strategy, risk profile and return goals?