Understanding Bitcoin

Part Two of "What's The Deal With Bitcoin"

In the first article of a two-part series, What’s The Deal With Bitcoin, we reviewed the definition and history of money, the traits humans look for in searching for sound money, and why Bitcoin came into existence.  In this article, we discuss the technical aspects of Bitcoin, arguments for and against it, and how to determine if it is suitable for your portfolio.

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What is Bitcoin?

Bitcoin is a secure digital ledger, which uses blockchain technology to store all transactions.  The intent of the technology is to increase financial efficiency by moving away from a system involving trusted third-party intermediaries, such as financial institutions, to a system of cryptographic proof of work.  Those who approve the blockchain transactions and provide “proof of work” are known as “Nodes.” For their work, Nodes receive Bitcoin (See below regarding scarcity) and additional transaction fees. The creator of Bitcoin, which remains anonymous, set the program’s parameters at inception and therefore locked them in for eternity.  See Bitcoin:  A Peer-to-Peer Electronic Cash System for more details.

The Case “For” Bitcoin:

  • Perfectly Scarce: Proponents believe Bitcoin best adheres to the characteristics of money humans value most. At its inception, the Bitcoin parameters limited its supply to 21 million.  This means the number of Bitcoin is finite, making it perfectly scarce unlike gold or fiat currency.
  • Decentralized: Bitcoin is controlled by no central authority.  The initiation of quantitative easing/money-printing programs by sovereign governments following the 2009 global financial crisis validates and strengthens Bitcoin.
  • Network Effect: Network effect is the idea that a system, or network, becomes more robust and more valuable as more people use it.  While Bitcoin is still in its infancy, many of its supporters believe the cryptocurrency reached escape velocity in terms of its adoption and will only continue to gain in value.

An Argument “Against” Bitcoin:

  • Tremendous Volatility: While Bitcoin continues to gain popularity, its future remains uncertain.  As a result, its value will experience tremendous volatility for the near term, thereby questioning its use as a currency or store of value.
  • Decentralized: While proponents of Bitcoin see decentralization as an advantage, many view it as a disadvantage.  If mistakes are made during transactions, there is no third party to arbitrate disputes.  Additionally, many people find the lack of physical backing by something tangible like gold, or the full faith and credit of a government, as a hard concept to embrace.
  • Security Concerns: While the Bitcoin network itself is virtually impossible to hack, the Bitcoin exchanges are highly vulnerable.  To ensure one’s Bitcoin is safe, personal digital wallets with password protection are necessary.  Unfortunately, instances of people forgetting or losing passwords have occurred, rendering their Bitcoin lost. Another more recent example of the dangers of crypto involves the Bitmart hack where victims have lost $200M.
  • Regulation/Potential Ban: The one power governments enjoy more than any is their monopoly over the money supply.  Controlling the money supply allows governments to continue spending by passing the stealth tax of inflation to their citizens instead of politically damaging direct tax increases.  Bitcoin is a threat to this power and will be regulated at a minimum.  Additionally, Bitcoin’s use as a tool in high-profile cyber-attacks and other criminal activity is a continuing problem and will only encourage further regulation and oversight of its use.  While proponents of Bitcoin argue it is virtually impossible to destroy, opponents argue it does not need to be destroyed to be rendered useless by governments choosing to ban its use.

Should You Invest in Bitcoin?

The argument surrounding Bitcoin is about how best to counter the adverse effects of inflation.  While our firm prefers to defend against inflation by betting on high-quality companies providing goods and services people need over time, others prefer a different route.  As it pertains to Bitcoin, NO ONE truly knows its future.  And because of this uncertainty, it will remain tremendously volatile, and we strongly recommend seeking the advice of an investment professional before allocating any money to the space.


certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.


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