REA University: Bitcoin & Other Digital Assets

REA University: Bitcoin & Other Digital Assets

February 22, 2024

What exactly is Bitcoin?

In the vast landscape of finance, the technology underpinning Bitcoin and cryptocurrencies stands out as a potentially revolutionary force, transforming the way we perceive and engage with traditional currencies. At its core, Bitcoin relies on blockchain technology, a decentralized and distributed ledger that records transactions across a network of computers. This method not only ensures full transparency but also eliminates the need for intermediaries like banks. Cryptocurrencies, including Bitcoin, operate on a peer-to-peer network, allowing secure and direct transactions. Cryptographic principles safeguard the integrity of transactions, offering a level of security that traditional financial systems often struggle to match.

If you (like most people) find that confusing, think of using Bitcoin as sending a letter to a friend, but instead of using regular mail, you're using a special kind of digital mail called cryptocurrency. Instead of writing your message on paper, you write it on your computer or phone, and the resulting digital message is called a transaction.

Imagine you want to send this digital letter to your friend securely. You put it in a special digital envelope called a block. But before it can be sent, it needs to be checked by lots of people to make sure it's a real and valid letter. These people are like the post offices that check every letter to make sure it's safe to deliver. Once your digital letter is checked and approved, it's added to a digital book called a blockchain. This blockchain is like a giant book where all the letters are kept in order, and because it's stored on lots of computers all over the world, it's very difficult for anyone to change or tamper with the letters inside. This makes sending digital letters with Bitcoin safe and secure, just like sending real letters and packages through the mail!

This trademark blend of decentralization, transparency, and cryptographic security forms the backbone of Bitcoin technology that proponents say is paving the way for a new era in financial innovation.

The New Spot Bitcoin ETFs

New Bitcoin ETFs have garnered significant attention from investors for a plethora of reasons. First and foremost, these exchange-traded Funds provide investors with a convenient and regulated avenue to gain exposure to the world of cryptocurrencies as in their brokerage accounts (including IRAs and Roths!) without the complexities of directly holding digital assets. This accessibility is particularly appealing to investors who may be hesitant or unfamiliar with navigating the cryptocurrency market independently.

Further, the introduction of Bitcoin ETFs brings to the table some much needed new regulatory oversight and transparency to the cryptocurrency market, addressing concerns surrounding investor protection and market integrity. With Bitcoin ETFs being traded on traditional stock exchanges, investors benefit from liquidity and price transparency, enhancing their confidence in the investment vehicle.

Overall, Bitcoin ETFs represent an innovative and regulated investment opportunity for investors interested in cryptocurrencies. They provide accessibility, diversification, and regulatory oversight, catering to a wide range of investors seeking exposure to the potential growth of the cryptocurrency market while navigating the intricacies of digital assets in a regulated environment.

Now that we’ve touched on the “how” of accessing and investing in bitcoin, we’ll move on to the “why” one might consider such an investment.

Pros and Cons of Investing in Bitcoin

Investing in Bitcoin presents potential advantages such as high returns, diversification, and exposure to decentralized technology. However, it's crucial to consider the significant risks involved. Bitcoin and other cryptocurrencies have volatility, regulatory uncertainty, and susceptibility to market manipulation which present key challenges. The lack of regulatory oversight and potential security breaches in the cryptocurrency space underscore the importance of thorough research and risk management when considering Bitcoin as an investment.

Bitcoin's volatility presents challenges for investors seeking stability and predictability. Regulatory uncertainty surrounding cryptocurrencies and potential government regulations can impact Bitcoin's value and market sentiment. Market manipulation by large holders can also influence prices, requiring investors to be vigilant. Additionally, the diversification provided by Bitcoin might not be as durable as it appears on the surface. Consider the below data showing the correlation between Bitcoin and the SPDR S&P 500 ETF:

In essence, it can be said that Bitcoin returns are fairly lowly correlated with equities; however, in times of stress (represented by days where equities are down more than 1%), this correlation nearly doubles. Thus, we find little merit to the narrative that bitcoin can somehow serve as a form of “digital gold” because correlations are much higher than those of the precious metal.

In summary, while Bitcoin offers potential advantages, it's essential to carefully consider the associated risks, including volatility, regulatory uncertainty, market manipulation, and security concerns. Conducting thorough research, implementing risk management strategies, and staying informed about the evolving cryptocurrency landscape are crucial for making informed investment decisions in Bitcoin.

Other Use Cases for Blockchain Technology

Beyond cryptocurrencies, blockchain technology holds the potential to revolutionize various industries. Its decentralized and transparent nature makes it ideal for the following use cases:

In supply chain management, blockchain enables enhanced transparency and traceability, streamlining processes, reducing fraud, and improving accountability.

For identity verification, blockchain offers a secure and decentralized alternative, enhancing privacy, security, and user control over personal data.

Blockchain technology can transform voting systems by providing a secure and transparent platform for conducting elections, ensuring the integrity of the electoral process.

In healthcare records management, blockchain provides a secure and interoperable platform for storing and sharing patient data, improving care coordination and patient privacy.

These are just some of the potential use cases for blockchain technology. Overall, blockchain offers enhanced security, efficiency, and transparency across various industries, which has the potential to drive digital transformation and usher in a new era of trust and transparency in the global economy.

RiversEdge Advisors, LLC is a registered investment adviser.  Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.