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What are Bitcoins?

TRUE TALK FINANCE BY RUDY EIDENBOCK

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This month I thought I would take a break from stock market reporting and address another emerging facet of the financial world, crypto currency.  There are a number of virtual currencies out there but what is discussed the most at this time are bitcoins and the hype surrounding them.  So exactly what are bitcoins?  They are a brand of electronic cash that exists only in cyberspace.  In other words, they are a computer program.  So, unlike physical currencies, you cannot put them into your wallet or purse.  A bitcoin acts like a dollar but with some important differences.  You can exchange it for goods and services if someone accepts it as a form of payment.  But, unlike traditional currency, bitcoins are not issued by a government or a central bank.  Introduced in 2009, it runs on a decentralized network that no single institution controls.  Critics point out that since there is no third party, there is no government protection against fraud. This was true in the beginning when bitcoins were used extensively in black market transactions.  However, owners of bitcoins point out that like US currency there is only the promise that the person(s) on either side of the transaction will honor the currency as payment.  This is true.  Prior to the 1970’s the US Treasury was on what was known as the gold standard.  This meant that there was an amount of gold in their coffers equal to the value of each dollar in circulation.  As I have pointed out in previous articles, there is currently nothing backing up the US dollar but our governments promise to honor it by its good faith and credit.  

 

So, how does a person go about owning bitcoins?  There are a number of exchanges around the world that help facilitate the buying and selling of bitcoins.  However, unlike the US Treasury printing money when it needs to put more into circulation, bitcoin mining creates additional coins as rewards for those who keep the network of bitcoin transactions running smoothly.   And the financial markets being what they are, some numbers crunchers came up with a way to trade them on an exchange.  And alas, bitcoin futures contracts were born.  Now what exactly is a futures contract?  It is a legal agreement to buy or sell something at a predetermined price at a specified time in the future.  These contracts will vary in value along with the price of the asset being traded.   In addition, futures contracts have been bundled together into exchange traded funds that trade directly on the major stock exchanges.  So now it is possible to invest directly or indirectly into bitcoins, but only if you have an EXTREMELY HIGH risk tolerance. 

 

The reason is that from the time bitcoins were introduced in 2009 to 2016, their price didn’t do much so not many people took notice.  However, in 2017 the price of bitcoin skyrocketed.  The reasons for this are still being debated but one thing is certain, the roller coaster ride could just as easily take the investors in the opposite direction, straight down.  You see, digital currencies lack the regulations that other securities have in place.  Regulatory authorities such as the SEC and FINRA currently have little jurisdiction over bitcoins.  And bitcoins can’t be placed in a bank savings account so the FDIC insurance does not apply either.  So, if codes are lost or stolen, the bitcoins will not be accessible by their rightful owner and therefore will be gone forever.  This is not as farfetched as it may seem.  For instance, what if one of your relatives owns bitcoins and passes away?  Most likely the passwords and the codes would be known only to them and will die with them along with the bitcoins. So how does one safely pass this cryptocurrency on to their heirs?  No one knows at this point.

 

So where will bitcoins and cryptocurrencies go from here? No one can agree on that either-it’s too early in this story to tell.  Bitcoin could be one of the biggest bubbles in history or the beginning of an important currency revolution.  

 

If you have any questions about this article or I can be of assistance, feel free to contact me at 480-296-9556.

Rudy Eidenbock, Financial Advisor, RJFS

Purity Wealth Advisors, 4111 E. Valley Auto Dr. #104, Mesa AZ 85206

Office:480-307-9909, Cell 480-296-9556

rudy.eidenbock@raymondjames.com

Purity Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

All investing involves risk and you may incur a profit or a loss. Raymond James Financial Services and its employees may own options, rights or warrants to purchase any of the securities mentioned. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Rudy Eidenbock and not necessarily those of Raymond James.  Prior to making an investment decision, please consult with your financial advisor about your individual situation. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.