Last week we had some good news with the February jobs report showing an above-expected increase in jobs. We also saw Treasury yields, or the amount of income earned from a Treasury bond, increase to about 1.6%. Federal Reserve Chairman Jerome Powell eased fears of increasing interest rates a bit by suggesting that the Fed will remain patient and not rush to increase rates. Overall, the market was down last week but started to rebound on Friday.
And with all this volatility, people are looking at other things besides stocks. I continue to get questions about Bitcoin, a type of crypto currency. First, some history and explanations. In 2008, an anonymous author wrote a white paper under the pseudonym Satoshi Nakamoto outlining a new type of currency that was not under the control of a central bank or government. The supply of a crypto currency is finite, unlike our normal monetary supply.
There are a number of crypto currencies available, but for discussion purposes we will focus on Bitcoin, the oldest and largest crypto currency. It was launched in 2009. Bitcoins are created through mining, solving complex mathematical computations that are added to a blockchain, a sort of ledger or list of transactions stored on the internet. There are a total of 21 million Bitcoins that can be mined, and as of January there are just over 2 million left to be mined.
Unlike traditional currency, crypto currency is completely untraceable. That’s great if you’re doing something illegal, not so great if you’re trying to track down criminals. Assuming you’re on the legitimate side of things, you store your bitcoins in a digital wallet, and transfer payment using your password. If you lose your password, you lose your wallet. Right now, about 20% of all bitcoin has been permanently lost due to lost passwords. And once a transaction is made, there is no way to dispute the transaction as you can with a credit card.
Further, if you use Bitcoin to pay for something, that’s treated as the sale of an asset by Uncle Sam. For example, you invested $10,000 in Bitcoin and it’s now worth $15,000. When you go to buy your Tesla, that’s not treated the same as buying it with cash. You’ll report the sale of $15,000 in Bitcoins, and pay capital gains taxes on the $5,000 of gains.
If you’re thinking of Bitcoin as an investment and not a payment system or currency, remember that it has no intrinsic value like a stock or bond. It has value because people say it has value, much like gold or silver. It doesn’t create value, pay interest or generate a profit. In 2020, the daily swings of Bitcoin were greater than the market as a whole in 2008 – the market’s most volatile year on record. At this point, investing in crypto currency is still highly speculative. A small piece of your overall portfolio is okay to gamble with, but I always recommend a diversified portfolio aligned with your goals for the majority of your holdings.
Your action to take this week is to check your credit report. Go to annualcreditreport.com and review your reports. Confirm the accounts are correct, and that you don’t have any accounts or judgements against you that you were not aware of. A good credit score impacts your life in many ways, especially in the interest rates you’ll pay.
You can always find more information on our website at covingtonalsina.com. And for the month of March, we’re donating $5 for everyone new who likes our Facebook page to The Summit School, an independent school for children with dyslexia and other learning differences, up to $500.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.