Is Bitcoin the newest money making fad or a legitimate investment?

Managing Your Money

Let’s break this down in simple terms. Imagine you and I are standing face to face. You have $1, I have no money. You give me the $1, now you have no money, and I have $1. We don’t need a third party to help us make the transfer. We’re both there and you put the dollar in my hand. That’s it, it’s done.

Now let’s say we’re not together and you want to give me money, so you do a transfer from your bank to my bank or through a Western Union type place. We need a third party to make the transaction, to make sure the money is taken from you and given to me, and that middle man is going to charge us a fee. As a side note, Western Union processes over $400 billion of money transfers for immigrants annually. Transaction fees can be exorbitant, as much as 50% of the amount for small amounts. That’s a lot of wasted money in fees, often for people who really can’t afford it.

So this is where cryptocurrency comes in. It’s not so much Bitcoin that is making waves, but the “Blockchain” technology behind it. Bitcoin is a digital form of currency, or digital coin. There are thousands of different digital coins aside from Bitcoin, such as Ethereum and Litecoin to name a few, but it’s the technology that is so important and what all this hype is about. Blockchain technology is simply a ledger, or a log of transactions. It’s this ledger that eliminates the middle man, and hence many of the huge fees. The ledger keeps track of how many digital coins everyone has, and records all transfers of digital coins. This ledger is public, so it’s available to everyone. If one person tries to “cheat”, their ledger won’t match everyone else’s. As you know, if you send something digitally, like a photo for example, you keep a copy on your computer and now your friend has a copy as well. Blockchain technology prevents duplication of coins from happening.

Comparing this to my first example, if you have a digital coin in your digital wallet, and I have no coins in my digital wallet, and you send me a digital coin, then the ledger, which I remind you is public for everyone to see, will record the transfer and show that you no longer have that coin in your wallet, and now I have a coin in my wallet.  Money transferred, no middle man.

The potential for this Blockchain technology is huge. Aside from buying things with digital coins (as you would with regular money), the ledger technology could also be used for voting during elections, for land transfers, shipping contract, and so many other things. Are there flaws in this technology? It’s new, so of course issues and concerns are starting to emerge. There are worries about fraud, money laundering, and security among other things. There are also new digital coin offerings happening almost daily, some of them with big celebrity endorsements. Be very wary, because as with anything new that has the potential to make a lot of money, comes the risk of scams. Don’t jump in without doing your thorough research and due diligence.

If you haven’t been scared off yet by this confusing new technology, and the risks associated with it, there are many legitimate investment opportunities in this sector.  Not only in buying the actual coins, but also in companies who have involvement in the industry.  I would rank this as very speculative on the investment spectrum, and warn people to invest only what they can afford to lose. But if you like a little bit of excitement, and see the growth potential for a new technology, this could find a good little niche in your portfolio. In the spirit of full disclosure, I have not yet invested anything, personally or otherwise in this sector. Initially, it was because I didn’t understand it, more recently it’s because I’m just too chicken. I fear that a bubble could be forming and I don’t want to be in it when it bursts!

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 22 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or [email protected].

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.