A few years ago, one of my sons who has always been very tech-oriented introduced me to Bitcoin, which was trading for about $10 at the time. I felt his pain as he struggled to teach this “baby boomer” about the new digital technology which he insisted was going to flood the earth. In his words, “Dad, the nerds will soon run the world.” In more ways than one, I have watched that odd prediction begin to come true.
As I struggled to understand the concept of digital currency my son wisely pointed out that 99.9% of my monthly spending was probably already digital. He was right. And so, I set out to understand crypto currency, skeptical at first but over time appreciating the benefits it might offer the world.
In my office, we do not make recommendations on investing in crypto currencies like Bitcoin, but we are happy to share what we know about them to those who are interested. One of the most common questions we receive regards whether Bitcoin will ever replace the American dollar as the worlds’ currency, as claimed by some of its advocates. The answer to that question begins with how the dollar got to where it is in the first place.
Imagine you have a home to sell for $500,000. Would you sell it to someone who offered to pay you in Bitcoin? The vast majority would not, for this reason. Despite its recently soaring price, Bitcoin is extremely volatile. Its price routinely fluctuates in double-digit percentages even on a daily basis. If you accepted Bitcoin for your home, its value by the time you closed the sale would likely be significantly higher or lower than it was on the day the contract was signed. This volatility would make it very difficult for both buyer and seller, not knowing the final price until the day the sale closed.
The US dollar is the world’s most accepted currency because it is highly stable. If you agree today to buy a house for $500,000, those dollars will not have noticeably changed in value 30 days later when the deal closes. The stability of the dollar is what makes it desirable for financial transactions at home and abroad. The instability of Bitcoin makes it attractive to high-risk investors and speculators, but much less desirable as a currency with which to perform routine transactions.
Bitcoin or other crypto currencies may one day be widely accepted for regular financial transactions, but that won’t likely happen until prices stabilize. Ironically, that stabilization would make them less enticing to speculators. In the meantime, keep an eye on this new technology. As it evolves, I suspect many uses will be discovered not only for the coins, but the blockchain technology that drives them. My son was right. Our world is rapidly changing as “the nerds” take over. Investors should stay informed, so they are ready to invest when appropriate opportunities arise.
Investing in Bitcoin or other Crypto Currencies is speculative and carries very high risk. Our office does not make recommendations regarding these types of investments.
Dan Wyson, CFP® is author of “The Gold Egg,”and “21 Financial Myths” and owner of Wyson Financial 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.
