If you’ve been wondering where investor euphoria is, look no further than Bitcoin – about 13 million people around the world are cheering Bitcoin 10,000. Oh sure, US stocks are now in the second longest bull market on record (the longest was 1982-2000), but there seems to be a missing element to the current stampede: all-out excitement. Remember the late 1990s, when everyone was talking about stocks? It certainly doesn’t feel that way today. In fact, investors who call into my podcast and radio show seem to be more concerned about the downside, then the upside.
Perhaps that’s a tribute to how much damage the financial crisis, bear market and the worst recession since the Great Depression inflicted on us. For some, the sting of those losses will persist for years to come. But if you are looking for that emotional high, it’s time to talk about BitCoin, the crypto currency that has stolen the stock market’s thunder, in terms of euphoria.
I started covering Bitcoin almost five years ago, when it traded above $1,000 for the first time. At the time, it was a wonky, weird, pseudo-currency used to pay for drugs on the dark web, a cyber-black market. Now that Bitcoin has soared above $10,000 — doubling in under two months — and has made it into the mainstream conversation, it’s time for a quick cheat sheet.
What is BitCoin? It is a digital currency, which was launched in 2008 by an anonymous group of software developers. The currency was generated through a complicated, open computer program. Users “mined” Bitcoins by solving mathematical problems and were issued Bitcoins in exchange.
How do people get their hands on BitCoin? At first, anyone with a computer could download and run the software. Today, mining BitCoin (and the other Bitcoin-like alternatives) requires powerful computers. Until recently, the way that most people acquired Bitcoins was via payment for goods or services, by purchasing them through a variety of Bitcoin exchanges or by exchanging them with someone directly. That’s set to change. After the SEC rejected a Bitcoin ETF earlier this year, the Chicago Mercantile Exchange will soon start trading Bitcoin futures, enabling investors to bet on the coin’s future without physically owning it.
Who oversees Bitcoin? There is no central bank or government that backs Bitcoin — it runs on an independent network of computers. This was hailed as a feature, especially in the wake of the financial crisis, when distrust of financial institutions soared. The concept of a non-bank related way to conduct commerce was seen by many early adopters as a positive. From a consumer perspective, this feature is also a bug: because crypto currencies are unregulated, they can be prone to fraudulent schemes.
How big is the Bitcoin market? It has a market value of about $170 billion, which is tiny, but as the price increases and more people jump aboard, it is set to get much bigger.
Beside the mania, what are the practical applications of digital currencies? This is where the conversation gets interesting. The technology that powers Bitcoin is called “Blockchain,” which allows a network of computers to agree at regular intervals on the true state of different types of shared data, like transaction records. This so-called “distributed ledger,” is like a single, secure set of books, shared by many. That’s why the technology is appealing to the financial services industry, like credit card and payments companies as well as securities firms, who understand the significance of a system that allows for the exchange of value directly, without a middleman.
Should I jump on the Bitcoin bandwagon? The returns are tantalizing: Bitcoin is up about 900 percent this year and has soared an astounding 8,000 percent over the past five years. If you’re the type of person who likes to gamble, can take extreme price fluctuations and can afford to lose what you invest, go for it. Although some have argued that Bitcoin should be treated like any other asset class, it has not yet matured enough to be treated like a stock or bond. Until there is more regulatory oversight and plenty of consumer protections, stick to your diversified portfolio!
- Posted by Jill Schlesinger