The momentous upward move in the price of Bitcoin in late 2020 and early 2021 caused many people to take notice of the cryptocurrency world for the first time. While it is natural for people to be interested in or curious about this new cryptocurrency, it is surprising that people rushed to allocate capital in a space they had very little understanding of. Over the next two weeks, I will attempt to provide a basic understanding of the history behind Bitcoin, what it is, and the arguments for and against it so you can make your own judgment about its appropriateness as an asset within your portfolio.
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Let’s start from the Beginning: What is Money?
Any conversation about Bitcoin must begin with an understanding of money. Webster’s dictionary defines money as: “something, such as coins or bills, used as a way to pay for goods and services.” I would expand on this definition by adding that money is “a unit of economic measurement” to exchange for and assess the value of goods and services. Furthermore, as a unit of economic measurement, the implication is that money should remain constant.
The History of Money
Before the advent of modern-day money, people used the barter system to trade for goods and services. Over time, people searched for more efficient ways to trade/transact, including precious metals such as gold and silver, and, most recently, paper money currencies backed by the full faith and credit of sovereign governments. The transition to digital currencies, such as Bitcoin, continues the search for the most efficient way to transact. The characteristics we are looking for in this search include:
1) Durability (Stands the test of time)
2) Portability (Easily transported over distance)
3) Divisibility (Broken down into smaller units)
4) Recognizable (Distinguishable from counterfeit money)
5) Scarce (Limited in nature and hard to counterfeit)
Genesis of Bitcoin
The original intent of Bitcoin, which officially launched in January 2009, was to provide an alternative form of money operating free of centralized control, i.e., government control (Original Bitcoin White Paper). Post-2009, the perception of cryptocurrency changed as sovereign governments around the world began aggressive Quantitative Easing programs, such as printing new fiat currency as a means of economic stimulus to offset damage sustained during the global financial crisis. These extreme measures violated the tenet of scarcity and advocates called in to question the validity of fiat currencies as the best tool for economic measurement. As a result, Bitcoin evolved into a perceived store of value in addition to an alternative way to transact.
Next week, I will look at the arguments for/against Bitcoin and my thoughts on how you should think about cryptocurrency in the future. Be sure to consult with your financial advisor before pursuing cryptocurrency.
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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