Quote:According to Michael Harris, author of “Fooled by Technical Analysis,” bitcoin tends to be uniquely volatile, prone to extended periods of inaction followed sometimes by protracted periods of jarring swings
Bitcoin is all the rage lately. But it is suitable for average investors?
A cursory glance of the wild swings in the so-called cryptocurrency suggests that the asset likely would take an ironclad constitution to stomach its massive price gyrations. That makes it likely unsuitable for average mom and pops.
Still the digital currency, which has been on a tear of late, setting a series of all-time highs, has garnered the interest of novices, who don’t know the first thing about bitcoin or the blockchain—the universal record of all bitcoin transactions. Each computer running the bitcoin software keeps a copy of the ledger encoded in its system, which is one of the benefits of bitcoin and the blockchain: its perceived security.
The growing appeal of the popular virtual currency in part is that it has risen more than 130% since the start of the year, capturing the imagination of those prone to fantasize over the riches and early investment might garner.
It is now relatively easy to trade in the cryptocurrency. A simple app, of which there are many, allows individuals to transfer bitcoin BTCUSD+5.89% from person to person. There also are numerous exchanges and companies that claim to facilitate bitcoin trading, while businesses, such as Overstock.com accept it as payment. There are even ATMs that allow withdrawals of traditional fiat currencies from a digital wallet.
Individual investors can even roll over a traditional retirement fund, such as an individual-retirement account, or IRA, or a 401(k), into an account that offers so-called alternative assets including bitcoin.
Bitcoin IRA, a firm based in Sherman Oaks, Calif., says it offers an IRA that claims to provide direct ownership interests in bitcoin.
However, it may be costly.
The firm charges a one-time 12.5% fee for assets between $50,000-$100,000, for an opportunity to own bitcoin in a tax-deferred account. The fee is used mostly to cover security associated with digital wallets. On the upside, there is no liquidation or transaction fees. Funds are kept with a custodian Kingdom Trust, that charges a flat $100 fee a year for its service.
“We have about 400-500 clients, who on average have $50,000 in their accounts. Typically, it’s people who would like to diversify into assets that are not in a fiat currency, because they distrust central banks and fear hyperinflation because of all the monetary stimulus over the past several years,” said Chris Klein, chief operating officer at Bitcoin IRA.
Investors considering diversifying into bitcoin should be extremely careful, however, according to Samuel Lee, founder of Chicago-based SVRN Asset Management.
“Bitcoin is still a nascent asset class, less than 10 years old, and its price is driven by speculators,” Lee said.
“Unlike stocks, whose prices go up and down with the business cycle, bitcoin prices go up and down in a much shorter time, usually these cycles last a year or so,” Lee said.
According to Michael Harris, author of “Fooled by Technical Analysis,” bitcoin tends to be uniquely volatile, prone to extended periods of inaction followed sometimes by protracted periods of jarring swings.
Harris says the price of bitcoin collapsed more than 90% in 2011 and again by 80% in 2015 (as the following chart shows).
Put another way, $100,000 invested in bitcoin at the beginning of 2011 would have plunged to less than $10,000 by the end of that year—the kind of volatility a typical investor would likely be unable, or unwilling, to endure.
“One of its attractions, apart from its price rise, is the fact that it is not highly correlated with stocks or bonds, so is viewed as a true alternative. But its price volatility makes it unsuitable for most investors. As an adviser it would be reckless for me to advise you to buy cryptocurrencies,” Lee recommended.
Moreover, bitcoin has been prone to hacks, where hackers exploit flaws at certain cryptocurrency platforms to gain access to a digital wallet, despite the inherent security of the currency itself.
In January 2015, nearly a year after the Mt. Gox troubles began, prices bottomed out at below $200 a coin, the weakest level since before the latest price runup began in late 2013. Back in February 2014, Mt. Gox, one of the first and formerly one of the largest bitcoin exchanges, abruptly halted bitcoin withdrawals, blaming a bug in the bitcoin software that allowed for the manipulation of transaction data.
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