Bit Coin Toss – July 2018
Recently a friend asked me what I thought about blockchain and bitcoin as an investment.
I first thought about currencies and then focused on the coin bit.
We toss coins. Coin tossing is a universally understood action. The coin toss is still widely used in sports. Commemorative coins are issued to mark special events. The hobby of collecting coins is called numismatics, and it is one of the oldest hobbies in the world.
What do you do with all of your coins? I toss them in a jar. Recently I rolled up all the quarters, dimes and nickels and lugged them to the bank. I had over $400.00 in coins!
No wonder the idea of a virtual currency is so appealing. No more coins, even though cryptocurrencies are called coins or tokens.
Blockchain is not a new technology, it was first introduced in 2008 with bitcoin. I assumed that bitcoin is a currency. Now I am not so sure. The blockchain technology drives the trading of bitcoin however bitcoin and blockchain are not one in the same. Blockchain technology can be used widely outside of cryptocurrency trading. Should we think about bitcoin as a currency? If we do, then I have to ask:
What is the purpose of a currency? What does a currency represent? How do crypto currencies impact our economy?
Currencies represent the health of an economy. Currencies represent how well monetary policies in a country work. The currency of a country can be a source of pride or despair. Regardless, our currencies are evocative.
Currency is nationalistic. When the European Union issued the euro, countries like Spain, France, and Germany had to give up their pesetas, francs, and deutschmarks. That’s another topic for discussion. There is something tangible about currency that we like.
Traditional currencies, paper and coins are used for transactions. Currencies are regulated. Cryptocurrencies are not regulated. For an individual investor this means there is NO recourse if something goes wrong.
Whatever dollars you use to buy a cryptocurrency there is no guarantee that you will be able to convert the crypto currency back into dollars when you need them. Even though I see less cash used for transactions (I’m standing behind the person who used a credit card to pay for a pack of gum, really?) we know that dollars have a value. An exchangeable value. The United States abandoned the gold standard in 1971 but the value of a dollar today is backed by the full faith and credit of the US government. We may take this for granted but the rest of the world does not. The US dollar is still considered to be the reserve currency of the world.
In the traditional currency markets, if someone in China or Japan wants to buy US Treasury bonds they have to use dollars. This means they sell their currency (the yuan or yen) and buy dollars to pay for the bonds. When they decide to sell their bonds, they will receive dollars. I use this example because I want to know how a cryptocurrency is valued if it is not actively traded or easy to exchange into dollars. Are there tangible assets involved? If I buy a cryptocurrency how easy is it for me to get my money back?
The value of a cryptocurrency depends on what investors think it is worth, but it is not a liquid security. It is not the same as cash. Cryptocurrencies are speculative investments. Speculative in the real sense of the word as investors are guessing and hoping the price will continue to go up.
Recently the price of bitcoin jumped 4% in a day, hitting $6,635.00 before retreating to $6,607.00. The news that caused the price jump was an announcement that Blackrock is beginning to assess the creation of an Exchange Traded Fund for cryptocurrencies. Several hours after the announcement Larry Fink, CEO of Blackrock denied the rumors.
The point is, based on a news report cryptocurrency can exhibit large swings in pricing over very short time periods. Short time periods as in minutes.
The Wall Street Journal posted a story about the theft of cryptocurrencies. (“Theft of Cryptocurrencies Mount” page B1 July 16th). Most of the thefts have taken place in Asia however the article points out that cryptocurrency exchanges, not held to regulatory standards have become easy targets for hackers.
The Securities and Exchange Commission continues to issue bulletins to make investors aware of potential risks of participating in Initial Coin Offerings (ICO’s).
I despair of all the pennies still sitting in my jar, but I can’t bring myself to toss them out.
SEC Stories
In keeping with the subject of this newsletter I have included 2 articles and one Investor Bulletin from the SEC. The articles are quick reads and are posted on The Modest Economist website. The bulletin I would use as a reference if you have specific questions on what cryptocurrencies are, and what the SEC is doing to make investors aware of the risks involved in Initial Coin Offerings (ICO’s). I have included the links below.
SEC Obtains Emergency Order Halting Fraudulent Coin Offering Scheme
SEC Charges Former Bitcoin-Denominated Exchange and Operator With Fraud
One Economic Indicator
This month’s economic indicator is the Standard and Poor’s 500 index. You will learn more about this indicator in my investing article on Performance. The S&P 500 is considered to be a leading indicator of the economy. Stock prices and the performance of the S&P 500 are a good barometer for what investors believe the economy will do in the future.
Investing Article
This month’s article is about investment performance and returns. How do you know if your investments are doing well? What is a reasonable expectation for returns?
New Book Review
I love this book so much I’m almost afraid to share it. I couldn’t survive without it. Wait for it ……
The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities.
Written by Bernard Baumohl in 2007. It isn’t a textbook. When Mr. Baumohl told a colleague that he wanted to write a book about economic indicators her response was: “How did you come up with this death wish?”
Glossary
As the glossary continues to grow, the big news is that we are going to reformat it so there isn’t much scrolling involved. New additions will be marked “New.” Very clever indeed.
THANK YOU FOR SUBSCRIBING TO THE MODEST ECONOMIST!
We are a modest but growing community of women who are learning how to invest.
Click here to go to The Modest Economist.com.
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
