Anytime an investable asset rapidly appreciates, you can be certain of one thing: people will all of a sudden be attracted to it, much like bugs willingly flying into a zapper. I know that analogy seems harsh, but for someone in my profession, that is what the rise in so-called "crypto-currencies" has felt like. If you are not familiar with the craze, Bitcoin and other crypto-currencies are unregulated forms of currency. They are digital in nature, so you can't actually hold them in your hand, and they have seen an unprecedented surge in price appreciation over the last year or so. Bitcoin and other associated crypto-currencies have been receiving nonstop coverage from financial media, and it has now seemingly gone more mainstream. Even CNN now shows the price chart of Bitcoin after talking about the Dow Jones industrial average, almost like a typical investment. Not only that, but people I hardly know and who are barely aware of my profession approach me at the dog park to ask my opinion and if it might fit into their portfolio, as if I would serve as some sort of validation or have an explanation for why it would be a good investment. The truth of the matter is that I, like most people, do not have a clear understanding of how it works and therefore cannot call it anything other than what it appears to be at this moment: craziness.
Let me start by mentioning that we as human beings are rarely rational when it comes to making investment decisions. As a matter of fact, we love to chase performance. We love the idea that there are vehicles to get rich quick. As soon as something appreciates, and the more rapidly the better, it starts to look great as an investment. Bitcoin as of this writing is up around 475 percent this year. So if you had gotten it at the start of this year, $100 would equate to somewhere around $475 today. The only other place I can think of returns like that are in the casino or some kind of lottery. Neither of which are usually great investments. At this point, you might be thinking "Wow, almost 500 percent; I should probably look into this." The interesting thing about Bitcoin is there hasn't really been a great explanation for the price appreciation. There isn't an underlying company with unbelievable earnings growth, nor is it a currency being adopted by a major country as the future of payments that may validate such price appreciation. Actually, it's somewhat the opposite - recently, China (one of the world's most populated countries) came out and decided to ban Bitcoin as a medium of exchange. It is also notoriously used for people to buy and sell things like narcotics and other black market items due to its ability to protect anonymity. There is also no physical asset backing the value of the currency. (Think the dollar and gold reserves.) Conventional thinking might lead you to ask: Well, if that's the case, why has it gone up to much?
Here's what I can tell you: Technological innovation is moving at a blazing pace. It seems every day the technology we bought so recently is already out of date or being replaced by something else. This can give us the impression that because something like Bitcoin is a new technology, and its price is appreciating so rapidly, it might very well be the next big thing. And I'm not here to tell you it is or it isn't. What I do know is, when people email, call or ask my opinion at the dog park, I will continue to shrug my shoulders. The technology, on top of being new, is probably not fully understood by those of us who are not extremely tech savvy. With that being said, it is hard to make a case to invest in something you can't understand. Time and time again, history has shown us that investing without a thorough understanding, and just piling into the next big thing can lead to catastrophic results for your portfolio. Get-rich-quick schemes always look great from the outside, as with the bug looking at the bright lights of the zapper. In 10 years, we may all be paying for our groceries in Bitcoin, and much of the value will be validated. Until then, I think we should all probably take a step back and ask, does it really have a place in the average investor's portfolio?
Robert Jeter is a Certified Financial Planner and financial advisor with InFocus Financial Advisors Inc in Salisbury, Md., and Georgetown. Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.