Should you buy Bitcoin or other cryptocurrencies? Maybe. Bitcoin has performed well this year, up 107%. Though it has done well, it still hasn’t eclipsed its all-time high set in 2017. If you want to buy Bitcoin, I would consider it an alternative investment, not as a substitute for cash or a money market fund.
Global currencies from developed countries are relatively stable, and a consistent store of value. The US Dollar, Euro, Pound, Yen, and Canadian Dollar fall into this category. Bitcoin may eventually become a stable currency, but it’s not there yet. In 2018 it fell 81%, and in 2019 it dropped 55% before bottoming in March of this year.
If Bitcoin is an alternative asset, then I’d recommend allocating no more than 3% to 5% of your investable assets to this class. For example, if you have $1 million in assets, an investment of $30,000 to $50,000 is appropriate.
How do you buy and sell cryptocurrencies? If you want to trade Bitcoin or other cryptocurrencies, I would recommend opening an account on Coinbase. On their site, you can trade Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. According to their website, they’ve exchanged more than $150 billion worth of cryptocurrencies across 102 countries through 30 million customers. If my math is correct, each customer has risked about $5,000.
Bitcoin is a digital asset tracked and stored on the blockchain. Bitcoin is the original cryptocurrency, and there is only 21 million Bitcoin. I’m sure I’m missing something about supply and demand, but I have always wondered why the price isn’t higher or why no one tries to corner the market. Bitcoin trades for $15,127, giving it a market cap of $317 billion. For example, Apple currently has 17.4 billion shares outstanding, and it’s selling for $119 per share. If Apple only had 21 million shares, it would trade for $96,523. In the 1980s, the Hunt Brothers tried to corner the silver market. The price of silver jumped from about $4 an ounce to a high of $48.70 for a gain of 1,117%. Silver would eventually fall to under $4 an ounce after their coup d’état failed.
Bitcoin is making its way to main street as Square and PayPal allow customers to buy and sell it on their platforms. Companies like Microsoft, Home Depot and Starbucks now accept cryptocurrency.
Do you need to own Bitcoin to create wealth? I don’t think so. Do you own a Van Gogh, da Vinci, or Picasso painting? Do you own thousands of acres of timberland? The Hope Diamond? A 1962 Ferrari 250 GTO? Drawers of Patek Philippe watches? Of course, these are extreme examples, but you’ll be fine without owning Bitcoin if you want to create generational wealth. If you’re going to use it to buy goods and services, that’s another story.
Here are a few links if you want to learn more about Bitcoin.
We have elected to put our money and faith in a mathematical framework that is free of politics and human error. ~ Tyler Winklevoss
November 11, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
This blog is not an offer to buy and sell Bitcoin. I do not own any cryptocurrencies because I don’t understand them as well as I should. If you want to trade this asset class, do your homework.
 https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp, Andrew Beattie, June 25, 2019.