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Bitcoin: Black Market Bait or Shrewd Investment?

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Like most investments, you can't hold it, touch it, or feel it. Bitcoin is a virtual investment that exists only in a digital domain. But you can't put a mutual fund on a shelf under glass, either. Bitcoin is the crypto-currency that has limited distribution and minimal acceptance but has gained maximum attention.

Favored by black marketeers who wish to sell illegal goods while remaining anonymous, bitcoin is struggling to gain mass -- and legitimate -- acceptance. But the decentralized digital currency has seen its value soar, then plunge, and then soar again. At a recent investor forum in New York, Michael Novogratz, a Wall Street hedge fund manager, boldly recommended investing in bitcoin. But Fidelity allowed bitcoin investments in its self-directed IRAs for little more than a week before pulling the plug. Only one investor took the opportunity.

So, is bitcoin a shrewd investment, or a financial folly?

Steering clients in other directions
"If clients are truly looking for a hedge or uncorrelated asset, we steer them in other directions," says Jeremy Office, an advisor in Delray Beach, Fla. "Bitcoin is so new it is like the wild, wild West, where anything can happen. That is not to say we don't believe there could be a place for it in a portfolio in the future once it becomes more widely accepted."

Office would rather offer private equity, venture capital, or hedge funds to investors seeking alternative investments.

Bitcoins are difficult to value
"I am advising clients to avoid bitcoins," agrees Andrew Comstock, a fee-only advisor in Leawood, Kan. "While bitcoins have rallied (and fallen) dramatically this year, it is a very difficult item to value. Since this is the case, it leaves you to rely on the 'greater fool' theory to make money. This is not investing in my mind, it is speculating. Hence, I avoid it."

Jim Blankenship, a financial planner based in New Berlin, Ill., is even more blunt about bitcoins.

"To be perfectly honest with you, I have not paid attention to bitcoin other than to read about it," Blankenship admits. "I don't consider it to be an investment or asset class, any more than I consider lottery tickets or tulip bulbs to be investments or asset classes. If a client asked about investing there, I would explain that my opinion is that it's no better than any other speculation and we shouldn't invest our 'serious' money in speculations. If you want to be involved, make sure that the money invested can be lost completely -- just the same as putting it in a slot machine."

Consider more proven alternative investments
Bitcoin could be broadly considered as a "satellite" investment, an asset class that supports the traditional "core" investments of stocks, mutual funds, and bonds. Dennis Roubal, a financial advisor in Marquette, Mich., prefers more proven alternative investments, such as real estate investment trusts, master limited partnerships, and business development companies.

"I mostly create income oriented portfolios, so these satellite investments provide added yield while lowering the overall portfolio expense ratio," Roubal says. "If a retirement goal is to be able to receive a 4% withdrawal rate from the portfolio, securities in the mentioned categories can raise the dividend rate to that level. The portfolio will then yield enough so that relying on capital gains or selling securities is not required to meet the annual distributions. Allowing capital gains to stay in the portfolio should create enough growth to increase distributions on an annual basis. That is the goal of a retirement portfolioL a stable and increasing income."

Anything but stable
Bitcoin has been anything but stable. After soaring to more than a $1,200 value in late November, recent pricing has plummeted after the People's Bank of China ordered third-party payment providers to stop using the digital currency. The price of a single bitcoin has fallen to less than $600 in recent days.

"We are very cautious about having any investments as volatile as a bitcoin," says David Hunter, an independent financial advisor in Asheville, N.C. "You can go and look at the meteoric rise and the 10% drops in minutes. There just seems to be too many unknowns to count them as a core investment. They seem to be more in line with a lottery ticket -- boom or bust are the two most likely outcomes."

Hunter says he prefers offering commodities, such as gold exchange-traded notes, as an alternative investment. He adds that if clients wanted to buy bitcoins through their investment advisor, they most likely couldn't, even if the advisor wanted to.

"There is an issue with how to purchase them," Hunter says. "You can't just request your brokerage firm to place a trade for bitcoins."


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  • Report this Comment On December 29, 2013, at 1:10 PM, VikingBear wrote:

    Chicken Little is right on--the sky is really falling.

    Zombie Money involes taking away power from governments. Governments do not take kindly to anyone or anything that reduces their power.

    (Then again, the best time to buy is when there is blood in the streets.)

    China's actions are the pointy end of their spear; how many more spears are being sharpened around the world?

    Zombie Money--too dead to lie down.

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