The hottest topic in America coming into 2018 wasn’t North Korea, it wasn’t Donald Trump, it wasn’t even one of the Kardashian sisters. The hottest topic has been a new(ish) concept, based on an innovative technology, that no one seems to know much about. Bitcoin.

This being the case we wanted to put some information out there that our clients can use to equip themselves and build informed thought process not just about bitcoin, but also how to evaluate new investment options that have yet to be proven.

We are not and do not claim to be experts on bitcoin, but we are professionals who are tasked with managing people’s wealth with long term goals in mind.

As Investment Advisors, a key measure of any investment we consider is that investment’s volatility. As a refresher volatility is how much an investment’s price fluctuates up or down. The more volatile an investment, the more prone an investment is to have wild price swings, and the riskier the investment is to own. To put this in context, when building portfolios for our clients we generally choose investments with low volatility.

When we look at the price of Bitcoin, we do not see low volatility, in fact we see incredibly high volatility. What does this mean for you as an investor? It means there is an incredible amount of uncertainty as to the direction the price of bitcoin is going to go. At the time of writing this, In the last 3 months the price of bitcoin is up 35%. In the last month? Down 41%.

Something else that many commentators have been bringing up, and with good reason, is the lack of fundamentals to value the price of bitcoin.

Have you ever heard people saying the stock market is over or under valued? Have you ever wondered what that meant? A major factor in the price of the stock market has to do with the earnings that the companies in America earn every quarter. Analysts and investors use a company’s assets and earnings, among other factors, to determine whether the price they are paying for a company’s stock is a good deal relative to the fundamental performance of that company. This makes sense, right? If a company has sold a lot of product and has low expenses, then they will have performed well and will have made money at the end of the day. If they have made money, then investors will be willing to pay to invest in a well performing company. In other words, the fundamentals of the company justify the price one is willing to pay for it. A statistic that many investors, including us, use frequently to judge whether the amount of money a company makes (earnings) is worth the price the company’s stock is selling for, is the Price to Earnings ratio. This measures how many times a company’s stock price is trading relative to their earnings. If a company’s stock price is $10 and it earned $2 per share in earnings last year, the company would have a Price to earnings ratio of 5 (10/2=5.) We would say this company is trading at a price 5 times its earnings.

A great question you should have right now is why you just had to read a finance lesson on basic stock valuation when we are talking about Bitcoin. The answer to that is because the illustration in the last paragraph was meant to communicate that we traditionally pay for a product based on what that product is worth. A large factor in what we will pay for an investment is because we can determine what it is worth based on its fundamentals. Bitcoin, uniquely, does not have any fundamentals for us to base its price from. Bitcoin has no product or service it is providing, it is trading at a price based on speculation and hype. These two things can be major warning signs because we don’t have any empirical evidence to reference or calculate what a worthy price to pay for a bitcoin is.

To close we’ll leave you with a bit of meta philosophy on the topic. The reality of the meteoric rise in the price of Bitcoin means some people have made a lot of money. Maybe those people who made a lot of money in bitcoin have done so because they are incredibly smart, maybe they’ve made a lot of money because they were lucky. The truth is probably somewhere in between. Mr. Jones next door may have won a million dollars playing the lottery last week, it just doesn’t mean you will.