Bitcoin is a so-called cryptocurrency — actually lines of code — stored on a computer or held by a third party in a virtual wallet. It’s yet to become a widespread form of payment. But enthusiasts are speculating that it might one day.
Renewed interest in bitcoin recently pushed its price up to more than $13,000. And just as quickly, prices started to fall. At one point, bitcoin dropped by more than $1,800 in a matter of minutes.
Douglas Boneparth, a certified financial planner based in New York, has a frontline perspective on investing in bitcoin.
In 2014, Boneparth teamed up with a childhood friend who has a doctorate in neurobiology. They split the cost for the purchase of a $6,000 computer, called a “miner,” which they needed to solve a complicated math problem that leads to the reward of bitcoin.
They were successful in getting bitcoins. But the problem that the computer solves becomes so complicated that, in six months, the computer couldn’t keep up and became a “glorified paperweight,” Boneparth told me in a recent interview.
In the five years he’s owned bitcoin, it’s been a wild ride.
“I watched it go as low as $230, and then as high as almost $20,000, and down to $3,300 in February of this year,” he said. “And now back up to $13,500.”
The latter was the high when we talked. A few hours later, the price of bitcoin had dropped to $11,500. By the way, you can buy fractions of a bitcoin.
“The same way I walk into a casino with money, that’s how I view bitcoin,” Boneparth said. “This is for fun and entertainment. I’m perfectly OK watching it go to zero.”
What Boneparth isn’t OK with is recommending bitcoin as an investment to his clients.
“No matter how exciting this is, it is still speculative,” Boneparth said. “It involves a massive amount of risk. It is not something that could lose half its value. It is something that could lose all of its value. So as a certified financial planner, as a fiduciary, I could not even begin to recommend that my clients take a ‘hold’ or position in bitcoin. However, I’m more than happy to educate clients who have questions around it so they can make the best decisions for themselves.”
I asked Boneparth: When does a speculative asset such as bitcoin become a less risky investment?
“One of the main attractions to cryptocurrency is that it’s not regulated,” he said. “In order for it to have wider adoption, I believe it would need to be regulated. But there are supporters who never want to see it regulated because that would pretty much fly in the face of its purpose.”
Boneparth’s venture into bitcoin mining taught him something about himself as an investment adviser.
“It strengthened my skill set in handling volatility in the capital market, because this is extreme trading,” he said. “I’m able to be unemotional when it comes to what I do professionally. … Don’t invest based on your emotions.”
The latest hysteria surrounding cryptocurrency also presents a good lesson in the difference between sound investing and speculation, Boneparth said.
Speculation is akin to gambling. But, with patience, you can create wealth by watching your expenses, saving and using that money to invest regularly in a diversified portfolio.
“There are no shortcuts in putting in the work that’s required to build that foundation,” he said. “Don’t be distracted from these foundational concepts in personal finance that truly have the ability to change your financial life.”
If you love a thrill and have money you can afford to lose, you could try your luck at buying bitcoin.
But for most investors, slow and steady investing — however boring it may be — is the best way to grow your wealth.