An Honest Look at Bitcoin

in Market Commentary by

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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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
Craig Birk, CFP®

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14 comments

  1. V

    This view is short-sighted. “It has little industrial use at this point beyond illicit transactions” is not true. While it is a very poor mechanism for buying groceries, consider other uses. For example, it’s an efficient means of transferring value (/capital/wealth) between individuals. Particularly those in different countries. And especially in non-Western ones.

    As for the rise in value of each coin, this is not just speculation but also due to its scarcity. Because only 21 million of them will ever exist, the value inherent in each coin goes up as the network becomes more popular. As people move more and more value through the network, the price of each coin goes up to accommodate it.

    At this point, bitcoin is more like gold than the dollar. It holds and transfers value, but isn’t used in everyday commerce. Unlike gold, however, it’s easily divisible, transferable, and securable, which makes many people view it as superior as a store of value.

    Reply
  2. Greg

    I usually ignore articles attached to my weekly PC Summary but this was a great read. I plan on tuning in more often.

    Reply
  3. John Vance

    It would be nice if Personal Capital would actually support tracking of Bitcoin assets. Even just starting with Coinbase support would be great.

    Reply
    • Jennifer Kincaid

      Hi John – At Personal Capital, it’s important to us that you’re able to track and understand your entire net worth, whether that’s cash, retirement accounts, stock options or bitcoins….We’re working on the linking issue with Coinbase now, but it’s easy to track just about any asset or liability within our app. You can do that by signing into Personal Capital, clicking the “+” sign anywhere you see it, then click MORE instead of your bank and then choose “Other Asset” and follow the prompts from there.

      Reply
      • John

        Yes, it’s possible to do this, but all updates have to be done by hand. Account linking aside, there isn’t even a mechanism to define how much of a cryptocurrency is owned and have it tracked automatically. This would be a relatively trivial addition, and one that other portfolio trackers such as Mint have already implemented.

        Reply
      • Dan

        If you would just allow us to use one of the common bitcoin proxy ticker symbols (I’ve requested this through the ticketing system already) like BTCUSD=X or even @XBT.1:CBOE. All the usual financial data providers can pull BTCUSD=X, but Personal Capital for whatever reason doesn’t recognize it or refuses to allow it.

        That way we could represent our bitcoin holdings AND not have to update the price manually. Because if I wanted to update my market data manually, I’d probably be using a spreadsheet 🙂

        Reply
        • Ken

          Really hoping that Personal Capital can add support for account linking to Coinbase soon!

          Reply
        • Anonymous

          This! They could easily just allow BTCUSD=X!

          Reply
  4. Bob O'Connor

    what about Ethereum? Although Jamie Dimon calls Bitcoin a fraud, it is my understanding he is a seed investor in Ethereum.

    Reply
  5. Michael R Palmeter

    If you don’t have anything to say, please be succinct. You used a lot of words to tell me nothing.

    Reply
  6. Crypto Guy

    Totally agree with John Vance. Regardless of Personal Capital’s opinion of Bitcoin or cryptocurrency vehicles in general, the fact is they have a value that people are willing to pay for, thus are currently an asset.

    You mention linking to Coinbase accounts which would be one avenue, although I personally wouldn’t link my account directly even if this functionality existed. Another would just be a curation of an API for your back end systems to query the current price as you do with other securities. If I type 1.3 BTC as a manually tracked holding, how hard is it to query what the current price is (on some chosen exchange) and translate that into a portfolio holding? Instead, each day I go on and update the price for the 5 different holdings I have to get a view into a total financial picture.

    Reply
  7. David

    Give PC a break. They are explaining why it is they do not include an asset class in the portfolios that they manage, which may not be relevant to folks who aren’t having their assets managed by PC.

    Reply
  8. Glen R

    I just installed Personal Capital in large part *because* I was hoping it would let me automatically track the value of the Bitcoin/Ethereum portion of my portfolio.

    Even though Bitcoin isn’t a huge part of my net worth, the fact that Bitcoin is *so volatile* means movements in Bitcoin have an outsized impact. Your current functionality means instead of having one app that summarizes the value of *all* my investments over time, I need to look in at least two places – yours for non-blockchain investments and somewhere else for blockchain investments. Not only is this inconvenient, but more importantly it invalidates all the pretty charts. If BTC’s movements make me 10% richer or 10% poorer in a given month and your charts don’t show it, the charts are missing a lot of important variance.

    What I want is exactly what Crypto Guy asks for – the ability to specify under “other assets” that I am holding, say, 1.1 BTC and 3.5 Ethereum, and your app looks up the price for those instruments to correctly summarize the impact of those investments. Please reconsider adding this feature!

    Reply
  9. Dan

    Cryptocurrencies are not backed by assets, they are backed by their utility, which goes way beyond “illicit transactions”.
    People want to actually have the freedom and assume personal responsibility to have control over their finances instead of relying on a bank to charge fees and to take care of their money for them, only being insured up to $250,000.
    People in countries like Venezuela and Zimbabwe want to protect their hard-earned wealth from hyperinflating currencies, by using a currency whose value has global exposure.
    Businesses would rather that their customers pay with cryptocurrency to completely avoid expensive credit card fees and chargebacks.
    The speed, cost and overall experience sending money with cryptocurrency, especially overseas, is leaps and bounds above using a service like Western Union.
    There are many use-cases for cryptocurrencies that aren’t even directly related to payments.

    I would not advise anyone to put their whole life savings into crypto, but it is a calculated risk, like everything else, and absolutely has a place as a part of a long term investment strategy.

    Reply

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