it is next to impossible to avoid
hearing or reading about Bitcoin within
the past decade it has gone from being a
fringe idea proposed in a paper written
by a mysterious author to being a
mainstream technology that some people
are treating is a new asset class
bitcoin is now getting attention from
the media individual investors and even
large financial institutions as Bitcoin
continues to surge in both popularity
and price investors will naturally
wonder if they should own some this is
an important question to ask but to
frame the decision about owning Bitcoin
we first need to know what bitcoin is
I'm Ben Felix associate portfolio
manager at pwl capital in this episode
of common sense investing I'm going to
tell you about Bitcoin
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bitcoin is a crypto currency crypto
currencies are a relatively new
technology that has emerged within the
past decade unlike traditional
currencies crypto currencies do not rely
on a central issuing body or sovereign
government instead they rely on
blockchain technology the blockchain is
an open distributed ledger that records
transactions in a way that is public
verifiable and permanent while there are
now countless different crypto coins
available Bitcoin was the first and it
continues to be by far the largest
cryptocurrency by market capitalization
you can buy bitcoins using traditional
currencies or you can line them mining
means receiving newly created bitcoins
in return for using your computer power
to compile recent transactions into new
blocks of the blockchain by solving a
complex mathematical puzzle there is a
finite supply of Bitcoin with a total of
21 million that can be mined more than
16 million of those are currently in
existence for a long time crypto
currencies were pretty obscure and
mostly popular within a very niche crowd
more recently the sharp increase in the
market value of Bitcoin and other
cryptocurrencies like ripple litecoin
and aetherium has contributed to intense
attention from the media and investors
being such a new technology it is
challenging to draw evidence-based
conclusions about what bitcoin is we can
try to work around this issue by finding
things with longer histories that
Bitcoin might share characteristics with
on his blog a swath de Motorin a
professor of finance at NYU explains
that things can fall into one of four
groups a cash flow generating asset a
commodity a currency or a collectible
the motor n goes on to explain that
bitcoin is not an asset since it does
not generate cash flows it is not a
commodity because at least for now it is
not a raw material that can be used in
the production of something useful
this leaves currency or collectible and
of the two it is most likely that
bitcoin could be classified as a
currency a successful currency needs to
be three things a unit of account a
medium of exchange and a store of value
as a unit of account bitcoin is as good
as anything as a medium of exchange
bitcoin is still far from being accepted
as mainstream for transactions and where
it is accepted transaction costs are
high Bitcoin has struggled as a store of
value due to a significant price
volatility
well Bitcoin has room to improve as a
currency we might be able to look at it
through this lens there is one other
currency in particular that draws
comparisons to Bitcoin gold gold will be
considered a currency not a commodity
because
value comes mostly from its currency
like functions not it's used as a raw
material to produce something useful
like Bitcoin the amount of gold can
exist is finite as a currency gold also
has high transaction costs and a
volatile price it seems like Bitcoin
could be a digital substitute for gold
but not everyone agrees in a medium post
Adam Lud win from chained a company that
builds cryptographic Ledger's explains
that he views Bitcoin not as a currency
but is a new asset class altogether he
does not think that cryptocurrency
should draw comparisons to traditional
currencies because their use case is so
much different ludwig explains that in
much the same way that stocks and bonds
serve public companies crypto currencies
serve decentralized applications a
decentralized application is a service
that no single entity operates due to
its utilization of the blockchain Ludman
explains that in general a decentralized
application allows you to do something
that you can already do like make
payments in the case of Bitcoin but
without the need for a trusted central
party the growth and acceptance of
decentralized applications could mean
enormous growth in the value of the
crypto currencies that serve them the
Motorin believes that bitcoin could take
one of three paths in the future
it could become the global digital
currency in which case its high price
could be justified it could become like
gold for Millennials a seemingly safe
place for those who have lost faith and
centralized Authority in this case the
price would fluctuate much like gold
knows lastly it could prove to be the
21st century to LaBolt a comparison to a
speculative asset that's soared in the
1600s before collapsing completely I
have just told you that Bitcoin can draw
comparisons to traditional currencies
like gold but it could also end up being
a whole new asset class of decentralized
applications take off or it can fizzle
out interesting right I know I haven't
answered what you're really wondering
should you invest I'll be talking about
that in my next video thanks for
watching my name is ben felix of PWL
capital and this is common sense
investing I'll be talking about a lot
more common sense investing topics in
this series so subscribe and click the
bell for updates I'd also love to read
your thoughts and questions about this
video in the comments
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you
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