Bitcoin Could Be Risky Business
Matthew W. from Virginia Beach, VA asks: Hi Mitch, I’m curious what your thoughts are on bitcoin. It seems like the “digital world” is the future for just about everything, and something like bitcoin could really continue taking off. I know it can be highly risky to invest, but could it make sense to put in just a little bit of money, assuming it could take off?
Mitch’s Response: Thanks for writing, Matthew. You’ve touched upon a subject that I’m sure plenty of investors are curious about. To be perfectly candid with you, I have not found any fundamental reason to own bitcoin or even consider buying it for our clients here at Zacks Investment Management. The list of risks surrounding the “cryptocurrency” are about a mile long compared to the pros, and it just doesn’t make sense for us to assume those kinds of risks relative to what we’re trying to accomplish for our clients over the long-term.
Let’s just say for argument’s sake that the pros for owning bitcoin are the potentially exorbitant returns. Great. Now think about the cons involved:
- Investing in Something You Do Not Fully Understand – which, I can tell you frankly, most investors cannot fully explain the granular details of how bitcoin and its exchanges operate.
- Bitcoin is Still Not Actual Money – Its usage is largely confined to ransom payments, drug deals, and other questionable activities in some dark corners of the internet.
- Built on Speculation – Since it is not real money or a physical asset, it’s price build-up is almost exclusively fueled by speculation.
- Exposure to Hackers – In order to trade in bitcoin, you need to have a digital wallet, which means exposing your money to hackers.
- There is No Central or Main Exchange for Trading Bitcoin – it is a haphazard market run by upstarts competing for your money.
- There is No Custodian Involved in the business of holding bitcoin and offering you regular reporting or insurance, like say a Charles Schwab or Fidelity would do for your investment portfolio of stocks and bonds.
- History of Being Hacked – Last summer, some $65 million of bitcoin was “hacked,” just stolen right off the web.
And the list goes on! One of my core investment philosophies is to only invest in assets you fully grasp and understand, and bitcoin does not fit into that category. What’s more, there was just recently a report of a Ponzi scheme involving bitcoin, that is being pursued by the Commodity Futures Trading Commission against a New York company called Gelfman Blueprint Inc. This company misled investors with promises for 7-9% per month returns using their high frequency algorithms to trade in bitcoin. Turns out, Gelfman Blueprint Inc. was using money from newer investors to pay back prior investors while also setting up online portals with false performance reports. According to the complaint, the company defrauded its clients of $600,000.
Without regulation and oversight, the bitcoin market is open to many bad actors who are hoping to make a quick buck on the speculative frenzy. These bad actors are looking for investors eager to join the frenzy, who won’t ask too many questions, and who will invest just based on the promise of high returns without any real explanation of how the market works. My advice: don’t be that investor.
The simple truth is that no matter where you invest there is no way to eliminate risk entirely. But, some investing strategies like the bitcoin market are riskier than others. Before you make your next investing move, it is essential to evaluate your risk tolerance and investment needs. This can be a difficult process to navigate on your own, so to help you through this process, I recommend you download our guide, “Retirement Made Easy.” Whether you’re just getting started or getting ready to retire in the next year, this step-by-step guide outlines how to plan for your financial future. To get your free copy, click on the link below:
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