3 reasons to NOT bet the farm on bitcoin
One moment the world is warned the bitcoin bubble is about to burst, and the next the popular cryptocurrency takes a gigantic leap in value.
That volatility makes it difficult for investors – or at least some investors – to decide whether bitcoin will enjoy a bright future or whether it’s a financial version of Beanie Babies, a fad that will quickly fade.
If you’re confused, don’t feel bad. Many financial professionals are still figuring out what to make of bitcoin themselves, says Jason Labrum, founder and president of Labrum Wealth Management and author of Financial Detox: How to Steer Clear of Toxic Advice, Achieve Financial Independence and Manage Your Wealth for Maximum Impact.
“Unfortunately almost anything connected with the future of bitcoin is speculative right now,” Labrum says. “When you look at the sophistication level of the average person buying bitcoin, it’s scary. They just see an asset that at times has gone up a whole lot in value, so you get a herd mentality of people wanting to jump on the bandwagon.”
Still, bitcoin is a fascinating development in the world of currency and one worth watching – even if with a little skepticism, he says. Just a few factors to keep an eye on or be aware of include:
• There’s potential for a regulatory crackdown. Bitcoin has already been hit by a crackdown from Chinese officials who have been severely restricting the use of cryptocurrencies. That may not happen in the United States, Labrum says, but countries around the world are going to deal with cryptocurrency in their own way and as they do, everyone could be affected. Regulation could help give cryptocurrency more legitimacy – or it could undermine what many people like most about it.
• Bitcoins exist as software, not physical currency. Even though bitcoins are not illegal, they also are not legally recognized by governments as a currency. The currency also can be traded without being tracked, thus raising the potential for illicit activity, such as money laundering.
• Cryptocurrency could represent a paradigm shift in our monetary system. What seems odd now – a virtual system of money – might be routine in a decade or two. Part of the reason bitcoin has surged is speculation that perhaps one day digital money will become a legitimate global currency, replacing coin and paper as the new legal tender. “It will be interesting in 20 years to look back on the conversations we are having today about bitcoin,” Labrum says. “By then, cryptocurrency could be a normal part of everyone’s life, or it could be a once-trendy thing that everyone has forgotten about.”
“So much about bitcoin and how it will play out is still unknown,” Labrum says. “If someone wanted to invest 2 or 3 percent of their portfolio in it just to get a small taste, that might be fine. But I don’t think anyone should be loading up 20 or 30 or 40 percent of their portfolio on this.”