The value of a single bitcoin has risen to $4,000 since its inception in 2009. Yes, you read that right, $4K for a single bitcoin.
Seven years ago, the price of a single bitcoin was roughly 7 cents. And while this cryptocurrency might seem like an exciting investment opportunity, buyer beware.
For investors with long-term investment goals, building wealth through a relatively new asset could do more harm than good. If you ever wonder why Stash doesn’t offer bitcoin, ethereum or other cryptocurrencies, here’s why.
Bitcoin is highly volatile
Volatility is uncertainty about the potential for price change for an investment over time.
High volatility means that an investment can go up or down dramatically in a short period of time. To get a sense of the volatility of bitcoin, the chart below compares fluctuations in the price of two currencies. The price of bitcoin in U.S dollars is represented in blue and the price of euros in U.S Dollars is represented in yellow.
This graph represents the standard deviation of daily returns for the price of bitcoin and euro against the U.S dollar. Standard deviation, measured as a percentage, is a common way to asses the volatility of a specific investment or asset. If the mention of standard deviations is giving you flashbacks to your least favorite class in high school, never fear, here’s an example.
Bitcoin and other cryptocurrencies have an unproven track record–including high volatility and lots of uncertainty
The highest volatility for the Euro against the US dollar since August, 2010 is 1.04%. In comparison the highest volatility for bitcoin over the same time period is 16.11%. This means that as of August, 2017 bitcoin per dollar can be up to 1,449% more volatile than the euro per dollar.
Yes, over a thousand times more volatile. That’s a big deal.
Volatility is not inherently bad
In fact, professional stock traders and speculators seek volatility as a way to obtain quick profits from sudden price changes in an investment. However, highly volatile investments are usually not suitable for the average person’s long-term financial goals.
That’s because for most people — for instance, a first time investor on Stash — future financial needs such as buying a house, saving for college, or saving for retirement are often certain and predictable. Consequently, investing in highly volatile and uncertain financial products is typically a big mismatch for long-term financial goals.
Let’s put it in perspective: Imagine you have some money today that you want to save for some specific goal in the future, like retirement. Would you put that money in an investment like the S&P 500 ETF that has returned 8% annually in aggregate for the past 30 years, or in an investment that could multiply your money 10-fold, but also risks leaving you with nothing?
Note that neither the S&P 500 nor bitcoin can assure you will earn a positive return in the future. Past performance does not guarantee the same or similar returns in the future, however, the point being made is that an investment like the S&P 500 has a known long track record, while it is too early to tell or have some sort of forecast for bitcoin returns.
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At Stash we believe that investing with discipline and consistency, while managing volatility, is more effective than investing in a volatile security such as a cryptocurrency, even though the latter could yield a big profit in a short time. Putting money in investments with a defined and clear record of volatility can help you achieve your financial goals by gaining the benefits of financial markets and the power of compounding.
(To learn more about the power of compounding read Why and How to Start Investing with Little Money).
Bitcoin regulation is unclear
Cryptocurrency is new in the financial world. Governments have yet to develop a full slate of regulations around it, which leaves major question marks hanging over bitcoin and other virtual currencies as an investment.
Around the world, countries lack agreement, alternately regarding bitcoin as a currency, commodity, or property. And those varying classifications can affect how bitcoin and other cryptocurrencies are viewed for legal purposes, which in turn can influence its investment value.
For example, the U.S. federal government has specific criteria for bitcoin, and the Securities and Exchange Commission (SEC), the federal agency that regulates securities, has a page dedicated to the inherent risks of this investment. Keep in mind the SEC recently rejected a proposal for a bitcoin exchange-traded fund this March, causing bitcoin’s value to drop 18%.
The vague and often ambivalent recognition from governments around the world has caused bitcoin and many other cryptocurrencies to remain a volatile and unsuitable investment for users looking to diversify for their financial goals. For new investors working toward long-term goals (a.k.a. the Stash community), bitcoin isn’t the type of diversification we recommend.
Bitcoin is not protected by a bank or government
Broker-dealer firms and financial institutions in the U.S. are regulated by the SEC. For example, brokerage services provided to Stash clients is done through Apex Clearing Corporation, an SEC registered broker-dealer. And such regulatory oversight usually brings comfort to investors. Broker-dealers are firms that execute orders to buy or sell stocks or other investments on behalf of clients.
(Learn more about how Stash protects it’s customers here.)
Investments like ETFs, stocks and bonds, held in a U.S regulated broker-dealer agency are protected against fraud, or firm bankruptcy through the Securities Investor Protection Corporation (SIPC). The SIPC, an agency overseen by the SEC, makes sure that if broker-dealers go bankrupt or commit fraud, the investments held within the firm for up to $250,000 in cash and of up to $500,000 for non-cash investments are returned to investors. This protection can offer investors comfort, particularly when making their first investments.
While SIPC protects investors for fraud, or if the company that holds the investments goes under, they do not protect against the decline in value of the investments within your account. SIPC also doesn’t protect investors who are sold worthless stock and other securities, nor it protects investors from a broker giving bad investment advice or recommending inappropriate investments. This is why it is important that you understand and feel comfortable with the investments you or your financial advisor makes for you.
Unfortunately brokerages and exchanges that offer bitcoin and other cryptocurrencies aren’t covered by SEC and SIPC protections and insurance. So investors not only carry the risk that bitcoin could lose value suddenly (remember all the volatility we discussed a moment ago?), but that it could also be stolen or hacked, without any government safeguards. If you think that’s a distant risk, keep in mind that more than one third of all bitcoin exchanges have been successfully hacked.
So is Bitcoin bad?
Absolutely not. Bitcoin, ethereum, and related blockchain-based cryptocurrencies have the potential to disrupt the financial sector and create new and more efficient markets.
However, bitcoin and other cryptocurrencies have an unproven track record–including high volatility and lots of uncertainty. In their current form, they could prove lethal for middle class investors hoping to save for the future and to build their retirement nest eggs.