In 2017 we experienced a crypto bubble, which burst in 2018. Bitcoin, the Godfather of all digital assets, was trading under $1,000 in January 2017. It then rallied to just shy of $20,000 that December before starting a precipitous decline over the next 12 months.
Bitcoin is once again thriving. Its narrative has adapted to the needs of a different generation of investors and is becoming a popular haven for the fears of excessive leverage and potential hyperinflationary currency printing.
By all accounts, 2020 has been a historic year for Bitcoin and the broader digital assets ecosystem. What was previously dismissed is now becoming an investment allocation for even the world’s most sophisticated investors. There has been a significant uptick in interest in the asset class amongst financial advisors and their clients, that is leading to several questions. Below are some of the most common ones along with answers:
What is Bitcoin and what is it used for?
Bitcoin was originally proposed as a universal digital currency that exists outside of sovereign nations. Bitcoin’s functionality is made possible through cryptography and specifically through its introduction of a blockchain.
While Bitcoin can be used as a currency in certain situations, the more widely accepted usage is as “digital gold” representing a store of value. This is important as Bitcoin does not have to replace the US dollar, or any other fiat currency, instead it can represent a liquid means of protecting one’s assets against value destruction such as currency devaluation. While today, this may not seem that important in the United States, remember that bitcoin is global. If you are in a nation where inflation renders your paycheck worthless immediately after hitting your bank account, you’re going to want to be able to swap into something that will better protect the real value of your principal.
Unlike fiat currency, Bitcoin’s supply is fixed via its code base and it cannot be arbitrarily created. Newly issued (‘mined’) bitcoin is released on a fixed, and steadily declining schedule. The final bitcoin will be mined in the year 2140, at which point there will be a maximum of 21,000,000 bitcoin in existence.
Blockchain: The Driver of Cryptocurrency
In short, blockchain is the underlying technology that makes bitcoin possible. A blockchain is simply a ledger and bitcoin blockchain is simply a public, distributed ledger. Every transaction involving bitcoin is recorded to the bitcoin blockchain. There are no other use cases for bitcoin’s blockchain, however, there are near limitless other use cases and possibilities for blockchain technology.
When a blockchain is utilized by other businesses, or for other decentralized purposes, it is a separate blockchain than bitcoin’s blockchain. In many cases these are built upon the
Ethereum protocol (ETH), which is a blockchain technology centered around software-driven ‘smart contracts.’ Blockchains can be public or private, opened or closed, but bitcoin’s blockchain does not offer this flexibility as it was developed for one purpose and one purpose only, to make bitcoin transactions possible.
In summary, blockchain technology exists because of bitcoin. However, since the introduction of bitcoin, blockchain technology has been utilized for many other use cases, largely powered by the Ethereum protocol.
How can I buy Bitcoin?
Bitcoin is not a regulated security and as a result it cannot be custodied by a broker dealer. So, self-custody is the most common way. You can download a bitcoin ‘wallet’, which will be associated with a “public key.” A quick google search will give you plenty of wallet options. Your public key is your wallet’s address, where bitcoin can be sent. Your private key is the means in which you can access the bitcoin in your wallet. This is critical to safeguard, because while the bitcoin blockchain cannot be hacked, you can certainly have your private keys stolen. If your private keys are stolen, your bitcoin is stolen, and the likelihood of recovery is essentially zero.
Investing in Blockchain
Currencies, such as Bitcoin and Ethereum, have garnered much attention and excitement, but investing in them is challenging, time-consuming and entails significant volatility.
Blockchain is the record-keeping technology behind cryptocurrency. Unlike the use of cryptocurrencies as a standalone investment, the broader blockchain technology entails less volatility and provides investors a more streamlined exposure to cryptocurrency and other emerging blockchain uses. (e.g. mass scale micropayments and applications that allow, for instance, a new musician to cut out the expense of a middleman and go directly to the consumer).
The ‘Demand Blockchain’ portfolio is designed as a comprehensive investment solution. It has exposure to over 50 companies that are actively involved in the development and utilization of blockchain technologies. Although a significant portion is allocated to the blockchain industry, we ensure that your portfolio is also globally diversified, which reduces volatility in the event of blockchain sector underperformance.
Are you interested in investing in the evolution of blockchain technology as part of a diversified investment strategy? If so, we are here to help! Open an account here or schedule a Zoom conference with one of our advisors today.
This report is a publication of Demand Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.