Derek Kravitz and Mike Zarrelli discuss what cryptocurrencies and Bitcoin are and share the implications of this asset class.
Cryptocurrencies Transcript
Derek:
Hi, everybody. This is Derek with FSA again with another Technical Tuesday episode. Today, we’ve got our very own Mike Zarrelli here as we’re going to discuss cryptocurrencies and Bitcoin, something he’s got a little bit of experience with. We’ve been getting an awful lot of inquiries from clients about what cryptocurrency is, what Bitcoin is so, we thought today that we’d sort of dive into that and discuss what those are and what the implications are of this very new, very interesting asset class. So, without further ado, Mike, let’s start us off. Can you give us sort of a broad definition of both what Bitcoin is and what maybe cryptocurrencies are?
Mike:
Yeah, thanks Derek. There’s been a lot of craze on the cryptocurrency recently, so this video is perfect timing. So as you may know, Bitcoin is one of the many types of cryptocurrencies, and it’s probably the most popular. And, in short, cryptocurrency is a digital asset that acts the same way that your typical say US dollar would. It’s a medium of exchange and a storage of value. But the main difference of a cryptocurrency is that it uses this unique feature called block chain technology, and by using this block chain technology, there is a general ledger that will keep storage of all the history of transactions, as well as how much Bitcoin each independent parties have.
Derek:
Yeah, I think that’s actually something that kind of merits discussing a little bit further as sort of an advantage or an interesting part of this cryptocurrency revolution is the block chain. Is there more in terms of differences that you can tell us or what the pros would be about using Bitcoin or other cryptocurrencies versus traditional money, whether it be this block hain technology or otherwise?
Mike:
Yeah. So, the biggest difference, or maybe the most obvious difference, is that by design cryptocurrency is meant to be digital and stay digital. So, whereas your checking account, you can go to the ATM or the bank and get a physical piece of paper out of your bank account, with a Bitcoin you really can’t do that. You’re not going to get a coin out of the machine and bring it to 7-11 to buy some soda.
So, another couple of distinctions that we can talk through is, Bitcoin doesn’t have a central controlling government or entity. So for example, the US dollar, we have the Treasury and the Federal Reserve that are in charge of the money supply of the US dollar. So, in times like now, there’s a lot of printing of US dollars and the risk of this is it could be devaluing the worth of the US dollar. With Bitcoin, there will only ever be 21 million Bitcoins. There can never be more or less. So, the supply will always stay the same. Now, the thing is to that can change and why Bitcoin has shot up in price is because there’s been a bigger demand for that limited supply.
Derek:
Can you tell us maybe more about what are the allures of using cryptocurrency over the US dollar? I know one thing that you’ve talked about with me is maybe the lack of international exchange that you would need. Can you go into sort of that with us and discuss that?
Mike:
Yeah. So, first off, Bitcoin, one of the reasons Bitcoin is the most popular cryptocurrency is because it’s the most liquid. So, it’s easy to exchange dollars or euros or any other currency into Bitcoin and vice versa. So, it’s a little more available if you will. To your point, there is no international transaction fees. So, Derek, if you go to Italy and you want to get a pizza from the pizza shop and pay with Bitcoin, that transaction, there’s no fee just because you’re in another country.
There are other fees, but that’s for the processing, which brings me to the next point. So, businesses usually pay two to three percent per total of each transaction when a credit card is used. In Bitcoin’s case, it’s somewhere near one percent which makes it enticing for businesses to allow Bitcoin to be used because they end up paying less in fees. Lastly, the benefit that a lot of people like is that it is a currency that is independent of political governments and there’s also some privacy of owning Bitcoin.
Derek:
Maybe we can touch on sort of your experience. I mean, as far as I know, within FSA, you’re the first and only at this point, even excluding myself, who’s actually bought or traded cryptocurrency. I mean, can you describe a little bit about what that process was like for you?
Mike:
Yeah. So, of course, it’s a very, very, very small speculative part of my portfolio. Really just dabbled into it and grew to learn more about it. So, there’s two types of ways to buy Bitcoins. There’s one actually buying a Bitcoin where you’ll get a digital key that you can use to access the Bitcoin on the general ledger. Or you can buy it similarly to buying a stock in your brokerage account where you don’t actually get that digital key, but you have some ownership in that sense of buying a stock, for example.
So, if you’re going to buy a large portion of Bitcoins, it’s definitely better to physically buy the Bitcoin, get that digital key and that way you can put it on a hard or cold wallet for safe storage. Now, Bitcoin is not all good and great. Derek, I know you, you’ve got some information you want to talk about, maybe the risk or the cons of Bitcoin in general.
Derek:
Yeah, well, I think that’s a great lead in because, as you were discussing, there’s difference in terms of storage of these crypto assets, depending on which route you take. One disadvantage – and it’s kind of a silly one, and we’ll get into a couple of the more serious ones in a sec – but one of the disadvantages is that if you lose your key to this digital wallet, if it’s sort of a private wallet, that’s it. You have a bunch of Bitcoin or other cryptocurrency that’s inaccessible. In fact, we’ve even seen stories such as one, there was one in Great Britain that I saw recently of a guy who was trying to get the landfill to let him excavate a portion of it because he thinks he threw out a hard drive that contains like $70 million worth of Bitcoin, and he’s trying to make a deal with the town council that, “Hey, I’ll share the proceeds with you if I find it.” And, so, I think that there’s still some irons to be, kinks to be ironed out with this new technology.
Now, on a more serious note, I mean, as you mentioned, yes, the hope that these Bitcoin proponents have would be that it’s so widely used that you could go to another country and you could pay for goods and services there with this digital currency so that you would avoid foreign transaction fees and even carrying cash in a foreign country altogether, which would be great. A disadvantage currently, obviously, is that if you go out to a dinner on Friday night and the check comes, you can’t pay for that in Bitcoin right now. The restaurant, they’re expecting to pay their vendors in US dollars. Their staff is expecting, expecting to be paid in US dollars. So, if and when this transition happens, I think it’s going be a long and gradual process. I don’t know that it will happen overnight, but that’s certainly a disadvantage right now is in terms of the places that accept Bitcoin, they are few and far between.
A second disadvantage is the volatility. Let’s say that you’re an employee who wants to be paid in Bitcoin. Okay, well, Bitcoin is at 40,000 per US dollar today, and today is payday. Two days later, it might be down to $35,000 per Bitcoin, and so there’s a tremendous amount of volatility there that you don’t really get with the US dollar or a lot of more stable national currencies. You know, the US dollar kind of does its thing,. It loses at two to three percent value to inflation every year. It’s kind of predictable, and households, companies, corporations, firms can sort of plan for that. It’s not as easy right now to plan for your currency being extremely volatile. So those are sort of the disadvantages at this point. And, obviously, another big one that we should highlight is that this is still very speculative. If you’re buying Bitcoin, you should be thinking about it from the standpoint of, “Whatever I allocate to this, if it were to go to zero or disappear, I would not lose my house over it. It would not be a significant amount of money.” Or like you said, in your personal case of your overall portfolio. So, I think those are, those are really important points to keep in mind at this point.
Now one thing I would say, though, is that in terms of the amount of vendors that are accepting Bitcoin, which is the first disadvantage I pointed out, we actually got big news this last week in which Elon Musk and his company Tesla have announced that they made a very significant investment into Bitcoin. They bought about $1.5 billion. They’re storing it on their balance sheet, and they’re looking to start accepting Bitcoin as payment for their products, so there could be a time in the not-too-distant future where you could buy a Tesla car with Bitcoin. So that’s fascinating. So, we are seeing these slow but definitely gradual movements in this direction of further adoption. So I think that’s really interesting.
Mike:
Yeah.
Derek:
So, yeah, I mean, in conclusion, Mike, I mean, do you foresee this trend continuing, and what would be your big takeaways for cryptocurrency as we stand here in the start of early 2021?
Mike:
Yeah, I think that trend will continue, but like you said, do not bet the farm on Bitcoin or any other cryptocurrency. Taking a very, very small speculative portion of your total portfolio, getting some professional advice, and just going into it thinking, “I’m okay with losing this money,” that would be probably our best advice if you wanted to get into say buying Bitcoin.
Derek:
As with anything speculative, always good financial advice. I think we’ll leave it there. Thank you for watching. This has been another FSA Technical Tuesday episode. As always, if you have any questions or comments, please reach out to us at questions@fsa.com, and until next time, Mike, thank you so much for sharing your insight and expertise.
Mike:
Yeah, thanks Derek.
Derek:
All right. Bye.
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