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?

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.