Despite the recent turmoil in the Bitcoin market, some financial advisors see a positive future for digital currencies as an alternative investment component in their clients’ asset allocations.
Bitcoins tumbled dramatically following the bankruptcy, in February, of the Mt. Gox exchange of Japan, one of the largest bitcoin exchanges in the world at the time. From a high of $979 last November, the price of bitcoins fell to a low of $456 in April, but has since turned upward, with a September 1st reading of $480, based on data from coindesk.com. The currency remains volatile, however.
Many financial advisors remain cautious about Bitcoin – due to its volatility; its reputation as an implement for laundering money and the fact that regulators are scrutinizing this currency for greater oversight; and because just a fraction of businesses in the US and globally today accept bitcoins as payments for goods and services.
There is also the likely impact of the IRS ruling in March that it will treat bitcoins as property rather than currency for tax purposes. That means that gains on Bitcoin transactions will be taxed like profits on other investments, and that bitcoin users will have to track each buy and sell transaction and the price at which the transaction took place. That creates a burden on bitcoin users that is not imposed on personal transactions in foreign currencies. There is hope, however, that the IRS might amend its March ruling to extend the exception for foreign currencies to include bitcoin transactions as well, according to one tax attorney who advises clients on bitcoin transactions.
A More Positive Current Environment
But given all of these concerns, the environment for Bitcoin seems to be more positive than many commentators may suggest. And some financial advisors are talking up the potential positives of digital currencies for the medium and longer term.
For one thing, the number of business establishments and organizations that accept payment in the currency has begun to increase. In an April article, Ric Edelman, chairman and CEO of Edelman Financial Services, listed a number of organizations that now accept bitcoin payments, including: Overstock.com; CheapAir.com; photo-sharing website Reddit; two Las Vegas hotel-casinos; Pitzzaforcoins.com, which arranges deliveries from Domino’s and other pizza sellers; the Sacramento Kings NBA basketball team; BitCoinShop.us, which lists goods for sale on Amazon, eBay and other retailers; and the dating site OKCupid.com.
“Perhaps the biggest growth potential for the use of bitcoins is apps on mobile devices,” Edelman added. “That’s because bitcoins themselves are software, and apps on wireless devices are a highly efficient way to pay for goods and services. Many merchants like bitcoin transactions because the fees cost them less than credit card transactions do.”
Bitcoin’s Potential as an Alternative Investment
Thus, despite the volatility, uncertainty and to this date speculative nature of bitcoin transactions, we see that an increasing number of businesses are willing to take payment in bitcoins. Likewise, a growing group of financial advisors are looking ahead to the potential of digital currencies becoming a significant “alternative investment” component, along with other alternatives such as hedge funds, private equity, real estate, commodities, and collectibles.
One thing that is likely to make that more of a reality is a soon-to-be-available Bitcoin ETF fund from the Winklevoss twins (recall their feud and court case against Facebook founder Mark Zuckerberg). That fund is likely to be on the market within the next few months. There is also the Bitcoin Investment Trust, from SecondMarket, that is now available to accredited investors, but will also be available to general investors within months.
David Zeiler, an editor at moneymorning.com, a financial and investment website, wrote in June that “with the Winklevoss Bitcoin ETF and SecondMarket’s Bitcoin Investment Trust just months away from approval, it may be time to consider the addition of a Bitcoin fund to your retirement account.”
Although he pointed out that such an investment may seem “overly risky” at this point, he suggested that Bitcoin could be considered as an “alternative investment.” Zeiler noted that “Some alternative investments, such as hedge funds, are beyond the reach of retail investors. But retail investors can buy alternatives like real estate and commodities, such as gold and silver.” He puts Bitcoin funds into this category.
In late May, financial adviser Jack Tatar, CEO of Gem Research Solutions and author of the book “Safe 4 Retirement: The Four Keys to a Safe Retirement,” weighed in on Bitcoin by saying that he intends to include them in his own retirement investment portfolio. In the article, “My Risky Retirement Bet in Bitcoins,” Tatar wrote: “I’m in search of a bitcoin investment for my retirement account — but that doesn’t mean that I consider bitcoins safe for retirement.”
He adds that, “By placing a bitcoin investment into my retirement account, I’m adhering to an asset allocation ‘rule’ that suggests I should have some small portion of my overall portfolio in ‘alternative investments.’ Alternative investments include hedge funds, private equity, real estate, commodities such as gold and silver — and I would think that bitcoins fall into that category.”
The bottom line here is that a growing number of financial advisors see digital currencies as a potential alternative investment opportunity going forward, despite their current volatility, uncertainty and riskiness. If the number of organizations that accept payment in bitcoins continues to increase, as we expect, then the market for funds such as the Winklevoss Bitcoin ETF and the Bitcoin Investment Trust – and others likely to follow – will probably accelerate.