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An Honest Look at Bitcoin

Stocks finished modestly higher for the week as tax reform and Bitcoin mania dominated financial headlines. A strong jobs report Friday also contributed. The Senate and House are still working to reconcile tax bills, and appear relatively close. Ultimately, the main feature of the reform is likely to be a lower corporate tax rate – though the amount companies actually pay now varies widely, so not all companies will benefit. On the individual side, there will be cuts for most taxpayers, but they are modest. Those in high tax states may see their effective tax rate increase. So far, although most Americans do not approve of the tax bill, stock prices have been enthusiastic about its passage.

Weekly Returns:
S&P 500: 2,652 (+0.4%)
FTSE All-World ex-US: (-0.1%)
US 10 Year Treasury Yield: 2.38% (+0.02%)
Gold: $1,248 (-2.5%)
EUR/USD: $1.177 (-1.1%)

Major Events:

  • Monday – Tesla is seeking to raise $131 million in solar asset-backed securities from its often overlooked residential division.
  • Monday – The House voted to go to conference with the Senate on the Republican tax bill.
  • Tuesday – Nestle agreed to buy Atrium Innovations for $2.3 billion.
  • Thursday – GE announced it would eliminate 12,000 power jobs after misjudging demand.
  • Thursday – Bitcoin shot past $15,000 even as $70 million of the currency was stolen from NiceHash, a crypto-mining company.
  • Thursday – Senator Al Franken announced he would resign amid sexual harassment allegations, making him the highest profile of a growing list of lawmakers impacted.
  • Friday – Non-farm payrolls increased by 228,000, signaling a strong job market and holding the unemployment rate at 4.1%.

Our Take:
Bitcoin’s meteoric rise accelerated this week. After recently passing the $10,000 mark, it rocketed as high as $17,000 on Friday before dropping to about $14,000 and finishing the day at just under $16,000 (depending on which price source you use). Stories of instant riches are stoking envy and causing more and more retail investors to want in the action. The media is awash with opinions, and they vary wildly. Some Bitcoin supporters are suggesting a $50,000 price is within reach, while many suggest the whole thing is a bubble and will come crashing at any moment.

In our view, all of these predictions are worthless. As an Investment Committee, we are frequently asked our opinion. The answer may be disappointing, but at least it is honest – we don’t know where Bitcoin prices are headed. What we do know is that Bitcoin is not backed by any real assets or expected future cash flows in the way a stock or bond is, and it has little industrial use at this point beyond illicit transactions. For these reasons, we choose not to include it in client portfolios. We also suspect increased regulation will happen, though a case could be made that this would be good or bad for crypto-currencies.

In the meantime, there is a market for it and so it will be worth whatever people are willing to pay. That is not much different than art or fine wine except that the increase in price has been much more dramatic. We think everyone must acknowledge that there is a chance prices go significantly higher and a chance they plummet. It is up to each person to decide if they want to gamble on it.

If you believe there is a much better chance prices will spike than fall, or an even chance but with higher upside, it may be worth the risk with money you can afford to lose. We’re comfortable sitting this one out and are reminded that envy is never a good reason for a trade.

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