Dear Chuck,

It seems like everyday I see a new headline about Bitcoin. There is quite a frenzy about this digital currency, but something doesn’t feel right to me. Do you have any advice? Is it a good investment, or just a bubble waiting to pop?

Sincerely,

Cautious Investor

Dear Cautious Investor,

Great question! I have had people – people who have never invested a penny in their lives- asking me whether they should “invest in bitcoin”.  Many have no idea what it is or how it works, they have just heard that a friend of a friend made lots of money and feel that they should jump in now.

Let’s take a hard look at this phenomenon before I give you my recommendation.  

The jaw dropping rise of bitcoin has created billionaires and stirred an interest in cryptocurrency like nothing we’ve seen before. Bitcoin started the year under $1,000, but rose to $19,500 Monday after closing to a meteoric rise last Friday.

What is it?

Bitcoin is a digital currency not tied to any central bank. It’s a cryptocurrency that is “mined” by complex algorithms and recorded in a digital ledger called a blockchain housed on computer servers. These blockchains track cryptocurrency transactions made of unchangeable packages called blocks.

It was created by someone using the name of Satoshi Nakamoto back in 2009. It is used in transactions without the involvement of middle men. In other words, no banks – no regulation. A growing number of businesses are accepting bitcoin including Expedia, Overstock and Microsoft.

Bitcoin is stored in “digital wallets” in the cloud or on one’s computer. The virtual bank account, not insured by the FDIC, grants users the ability to send or receive bitcoin in this “cryptocurrency world” via mobile apps or computers. In a way, it is similar to digitally sending cash. Owners or users have a “key” to send bitcoin that must be protected. And, several methods are available to protect these private keys. Here is a video offering a simple explanation of bitcoin currency.

Why the Fervor?

Joseph Borg, president of the North American Securities Administrators Association, told CNBC that bitcoin has entered the “mania” phase. He stated, “We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines…” He also noted that bitcoin is not regulated like futures contracts, because innovation and technology always outrun regulation.

Kevin O’Leary, of Shark Tank, believes that because of its volatility, it is a long way from being a currency. But some prefer it to other currencies because of its use across borders, ease in digital transfers, and anonymity for traders.

Now, speculators are putting their money towards various cryptocurrencies in the hope of riding the wave of gains. But Financial Times reports that the frenzy around bitcoin and blockchain stirs up memories of the dotcom bubble of twenty years ago.

On December 16th, Adam Ozimek, contributor at Forbes, stated, “…a good sign that there is a bubble is when a large share of market participants are buying based on untenable assumptions.” He did a twitter poll of bitcoin buyers and found that 72% of the 79 respondents bought to profit from rising prices. He believes buyers will exit the market once prices stop rising so rapidly. I agree.

Because unstable prices are not a desirable feature of a currency he does not believe borrowing and lending will occur in the bitcoin world. He finds, “The fundamental value of Bitcoin is based on its usefulness as a currency, as a medium of exchange. And I believe there is real value for some cryptocurrency there. But a good cryptocurrency will increase the money supply to match money demand better than bitcoin does. It will not be an exponentially appreciating asset that people buy like a penny stock.”

People are flocking to the market in the hope of making fast money. There are those who are in for the excitement fueled by the news and social media. Some are playing the market like they do the tables in Vegas.

To be balanced in my analysis, I have some friends who have purchased small amounts of bitcoin to better understand it as a potential investment. They have made fantastic returns. As they tell me their stories, it is hard not to feel left out of such incredible returns. I have even asked myself, “Was I too cautious about it? Should I have gotten in early? Is it too late now to jump in?”

Interestingly, both of my friends have expressed a number concerns about their “investment”. First, they had to make their login information to their bank accounts accessible to buy or sell their bitcoin. They do not like this and feel a sense of vulnerability or exposure.

Second, they are concerned that the program is a prime target to be hacked. One successful hack and all confidence in the cryptocurrency frenzy could evaporate. This could cause a flood of sellers to want out and the price to fall rapidly. Finally, there is a growing risk, in spite of denials by bitcoin fans to the contrary, that governments will step in and attempt to regulate cryptocurrencies and thus remove some of its current appeal as an alternative to traditional, central bank regulated currency.

Bitcoin and a Biblical Caution

The bitcoin frenzy is attracting a high percentage of gamblers, not serious investors. We’ve seen the devastation in lives of those who win the lottery. Most just don’t know how to handle sudden increase in wealth. I consider the purchase of bitcoin a wager not an investment. It has similarities to gambling and wild speculation versus a measured approach to wise investing.

Yes, the market is determining its value but the “mania” that we see in the market causes me to be leery. Is it possible that it turns out to be a very profitable wager? Yes, it already has for many. But don’t lose sight that the Bible warns us against any actions motivated by greed… those who desire to be rich fall into temptation, into a snare, into many senseless and harmful desires that plunge people into ruin and destruction. (1 Timothy 6:9 ESV)

We know that Solomon also warned, Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. (Proverbs 13:11 ESV)

The truth in Proverbs 30:8-9 is so important to remember and to use as a guide: Remove far from me falsehood and lying; give me neither poverty nor riches; feed me with the food that is needful for me, lest I be full and deny you   and say, ‘Who is the Lord?’ or lest I be poor and steal   and profane the name of my God.

I am watching and waiting to see what happens. In the meantime, I’m learning as much as I can. Do I suggest that you buy bitcoin? I don’t give investment advice. I only give Biblical advice and let you determine what the Bible is speaking to you. It has spoken to me that I should not wager on bitcoin.

Originally published on the Christian Post, December 22, 2017