Just What is Bitcoin Anyway?
As you know, we often say that we don’t invest in things that we do not understand or can’t explain – and there are many of those! But since some of you have asked about Bitcoin and many of us actually own a little in our S&P index funds (thanks to Elon Musk and Tesla) we decided it was time to learn a little and share a little. For you cryptocurrency experts out there, I apologize in advance for what I get wrong here!
Spoiler alert – we still aren’t recommending that anyone liquidate their retirement accounts or even dig up those dollar-filled coffee cans in the backyard in order to buy Bitcoin.
What is it?
Bitcoin is what is known as a “cryptocurrency”. It is actually a system of owning and transferring “bitcoins” to pay for goods and services or to collect currency in exchange for goods and services. Simple, right? Bitcoin has actually been around since 2009. It emerged after the financial crisis because it doesn’t require the use of a bank or a banking system – which were at risk in 2009. There is no governmental oversight or regulation, which can be good or bad, depending on your perspective.
As of today, February 23, the value of 1 Bitcoin is $47,408 USD. IT IS HIGHLY VOLATILE. Bitcoin has value because it is limited in supply – as all currency should be. More on this later.
Bitcoin works a lot like VENMO or any online bank, although there are a few big differences. To participate, a user first installs a “bitcoin wallet” on phone or computer. This installation generates a Bitcoin address which then generates actual Bitcoins, which I think of as virtual $47,000 coins. The user gets a public “key” which he shares with his commerce partners and a private “key” which he keeps safe and sound. I think it’s bad to forget this “key” as it’s then not possible to access the bitcoins. The bitcoins themselves are purchased via a Bitcoin Exchange or Bitcoin ATM!
After a transaction is completed, it is recorded in a Blockchain which feels like a massive checkbook register – but one that is actually used. The blockchain stores all the transactions in the blockchain and then updates the balances in the individual user wallets. This confirmation and encryption process presumably guarantees that the Bitcoins are only used once. In truth, because the value is so volatile, most users are investing in Bitcoin vs paying with Bitcoin. But that too is starting to change.
Users like Bitcoin for transactions because the use does not require ID or a bank so it can be used by the security or privacy conscious or in parts of the world where banking systems are underdeveloped. The currency transfers are fast and always available.
Where does Bitcoin come from?
I said earlier that Bitcoin is limited in supply. So, could the Defense Production Act be used to just make more? I don’t think so – at least not yet. New Bitcoins are Mined into existence by following an agreed upon set of rules. Simply, these rules have to do with finding the solution to a very complex mathematical problem. That solving process unlocks a set amount of Bitcoin, which keeps the supply limited. Math wins. Again.
Why Now?
If Bitcoin has really been around for 12 years, why are we just now hearing so much about it?
Tesla bought $1.5Bn in Bitcoin stock. And is talking about starting to accept it as payment for its cars.
Some cities, banks and companies (MasterCard) have announced plans to at least explore the potential benefits and risks to their businesses.
There has been a lot of interest by retail and institutional investors – along with the creation of cryptocurrency ETFs.
The pandemic has shifted transactions of all types to on-line.
It’s seen as an inflation hedge, much like gold or silver.
But likely the biggest reason: It’s a cultural phenomenon with its own social media push, vocabulary and even preferred purchases. Lambourghinis are reportedly a preferred purchase of Bitcoin zealots. Skeptics say that it’s gambling vs a real solution to a real problem.
Interesting to learn about, but we are still not suggesting that any of you should go stock up! As I said, most of you already own a little in Tesla shares, S&P 500 Index funds or Baron Opportunity. No doubt that some of the recent market volatility is driven by Bitcoin volatility. By the time, this Blog post goes up on March 1, today’s $47,408 USD value will likely be ancient history. But we have no idea whether it will be much higher or much lower!
P.S. On a lighter and more important note, Pfizer has now confirmed the expected news that Marci and I both got the real deal in their vaccine trial in August/September! Mom and dad are also now fully vaccinated. We are ready to see you in person when you are vaccinated and ready to see us!