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What do we think about Bitcoin…

19 March, 2021 by James Foggo in Commentary

We are asked from time to time about trading or investing in Bitcoin, a digital currency asset class that first appeared in 2017. Investor interest in Bitcoin and other crypto-currencies has grown significantly in the last 4 years as evidenced by national business news coverage, growing institutional and billionaire investors’ interest and most importantly, a recent $55,900 price quote for 1 Bitcoin.   We think it is worth commenting.

My daughter, 21 years old at the time, first asked me about investing in crypto-currencies about 3 years ago. At the time, I think it was trading under $1000 for 1 Bitcoin.  I was trained as a securities and investment services lawyer and I’m a 30 years plus veteran of the global asset servicing industry, so I dove-in with my conservative, risk-averse bias answering, “it seems very risky; I do not think it is legitimate; it is subject to illicit activity such as fraud, cyber-crime and money laundering; you need to be prepared to lose all your money if you invest in it.”  As a virtually penniless undergraduate student from UCLA, she (and dad) passed on investing in the crypto-currency.

It is 3 plus years later and she missed out on a big score, right?  Well, again, as a lawyer, I think the answer is “it depends”. Making a decision to invest or trade in Bitcoin is just like every other investment, focus on understanding the investment thesis and the risks associated therewith and make a decision to invest or trade based on your specific personal situation.  What is an appropriate risk-based decision for Party A might be an inappropriate risk-based decision for Party B.

In this instance, none of us knows the future but there is a strong argument to be made that a digital currency makes more sense than paper money in an increasingly virtual world.  The question in my mind is whether the US Government and other developed countries are going to allow a private consortium to control the future of transaction exchange and money supply.  I do not think that is very likely; however, that does not mean it is not possible for Bitcoin or other crypto-currencies to develop as a private mode of exchange and be a legitimate store of value. For example, some professional athletes have asked to be paid in crypto-currencies and Elon Musk has commented that Tesla will at some point in the future accept Bitcoin as a currency of exchange. Ray Dalio, founder of Bridgewater Associates, one of the premiere asset management firms, recently commented on Bitcoin saying, “Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of.”

Whether you or a friend or family member should invest in Bitcoin or other crypto-currency is a matter of what your predictions are for the future (i.e., that everything will be digital), how you feel about money and your overall risk profile. Some questions a person may want to start with are:

  • Can I afford to lose all the money invested?
  • Do I have a very long time horizon?
  • Do I have the temperament to ignore very large price swings?
  • Do I think Bitcoin will be accepted as a legitimate form of exchange around the globe?
  • Will I worry that Bitcoin will be de-valued by some other digital asset invention?
  • Do I believe that US currency will be displaced eventually by a private digital currency?
  • Do you believe Bitcoin will eventually replace physical gold as a hedge against government money printing that de-values paper currency?

For me personally, I am not interested in crypto-currencies after understanding the investment thesis and risks. I do not like the prospects of losing money on a speculative investment thesis.  That said, for others the bottom-line is there is no right or wrong answer except make certain that if you take the step you can afford to lose your entire investment.

James R. Foggo

 

Disclaimer

This article is intended for general guidance and information purposes only. Under no circumstances is it intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset. Always investigate and research before you invest.