Physician-investors have been huddling around the water cooler recently because everyone’s favorite high-risk investment vehicle is back in the news. According to Reuters, China has banned all crypto transactions and mining, including bitcoin and other prominent cryptocurrencies. It looks as though the government regulations this virtual form of currency has been avoiding are finally catching up to it.
Cryptocurrency, according to NerdWallet, is a digital currency, which like physical currency, can be used to buy goods and services from participating vendors. The technology that makes cryptocurrency possible is called blockchain, and it is the true star of the show. Blockchain provides the mechanisms by which the cryptocurrency is secured and unable to be duplicated. Blockchain is a decentralized technology and is spread across many computers that manage and record transactions all through a tight wall of security. Blockchain is the technology; cryptocurrency is a way to use this technology.
According to Rob Michel, Chief Investment Officer at Glen Eagle Advisors, LLC, “There are some interesting similarities between what we went through with the Dot-Com Bubble and what we are experiencing with cryptocurrency.” For those physician-investors too young to remember, Investopedia does a nice job of reviewing the infamous Dot-Com Bubble.
Basically, in the late 1990s the internet was gaining traction as a source of information, entertainment, and commerce. Since it was such a new technology (like blockchain is today), investors weren’t sure how to successfully monetize the internet, so they began to throw their money at anything associated with the internet. Investors abandoned the rules of investment valuation just to get a foothold in this technology (Sound familiar?).
“It’s the technology that is the real source of value; blockchain is a very interesting technology and will certainly have an impact on how business is done. Cryptocurrency, like bitcoin, is just one application of blockchain technology. It would be wise to remember the lessons of the Dot-Com Bubble when venturing into cryptocurrency investing. Yes, some individuals have made huge sums of money, but many others have lost money. Take the time to understand the risk of what you are investing in and talk to an experienced financial advisor,” cautions Michel.
Watching cryptocurrency as it continues to evolve will be very interesting. Just always remember to temper the excitement of this new investment product with a realistic knowledge of the risks involved.