Contributed by: Nicholas Boguth
What is it?
Think of Bitcoin as internet cash. It is a currency that does not exist in a physical form - a cryptocurrency.
It is decentralized which means that there is no central authority that manages it. Instead, there is a set number of Bitcoin in the market. The creator of Bitcoin created 21 million bitcoins, and no more will ever be created.
Each transaction is “peer to peer,” and each peer or “user” is anonymous. There is no middlemen such as banks or credit card companies that monitor and clear each transaction. Instead, there are companies, groups, and private individuals who reconcile transactions and are awarded bitcoins in exchange.
“$100 in bitcoin in 2010 is worth $75 million today.”
I love these headlines. Here is another fun fact: the first material items purchased with bitcoin was two pizzas. The “user” paid 10,000 BTC – about $25 at the time. In today’s dollars (6/15/17), that pizza cost over $22,000,000.
You may have seen these headlines, but what drove this value increase? To put it simply: demand. Demand is affected by a number of things (who accepts it as a form of payment, transaction volume, liquidity, tax treatment, security, news articles, etc.), but the demand has rose significantly since 2010 which has driven the price increase. As I mentioned before, there are a set amount of 21 million bitcoin, so the currency is designed to be deflationary. As its demand increases, its price will increase.
Investing in Bitcoin
While the headlines are fun to read, it is difficult to give investment advice regarding the currency. It is relatively new (created in 2009). There are very limited laws and regulations with regards to bitcoin. It is not widely accepted as a form of payment. There has been high volatility in the past. Ultimately the future of bitcoin is still very uncertain, but we will be staying up to date with the currency to keep you informed.
Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.
Any opinions are those of Nick Boguth and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Sources: https://www.washingtonpost.com/news/on-small-business/wp/2017/05/23/100-of-bitcoin-in-2010-is-worth-75-million-today/?utm_term=.cce93f146de2 http://www.businessinsider.com/bitcoin-pizza-day-passes-2000-20-million-2017-5