Julie Jason's Your Money: Bitcoin shows big returns, but remains a risky investment prospect

By JULIE JASON September 01. 2017 8:07PM
A virtual currency, bitcoin is an alternative payment system to currency issued by governments. (Zach Copley/Creative Commons)

What's the best-performing exchange-traded fund, mutual fund or index for 2017? An ETF that invests solely in bitcoin, the virtual currency.

This ETF posted the highest year-to-date return through July, of 185 percent, according to Steele Expert, a database of mutual funds, ETFs and indices produced by Steele Systems Inc. In comparison, the S&P 500 Index returned about 11 percent.

The same ETF beat all others over the three-year period ending July 2017. The ETF posted the highest three-year total return, 352 percent (65.4 percent average annual return). In comparison, the S&P 500 Index returned about 36 percent (10.7 percent average annual return).

The ETF has about $475 million in assets under management and invests in bitcoin, which according to its disclosure is "currently unregulated, highly speculative and volatile."

If you have not followed the development of bitcoin since its introduction in 2009, let me share some basics. A virtual currency, bitcoin is an alternative payment system to currency issued by governments. A FINRA Investor Alert on bitcoin, called "Bitcoin: More Than a Bit Risky," puts it this way: "Think of [bitcoin] as a sophisticated computer program that encrypts, verifies and records bitcoin transactions." FINRA, the Financial Industry Regulatory Authority, regulates all securities firms doing business in the United States.

Bitcoin is "created" by "mining."

Quoting from the alert: "Like mining for gold, the process is labor-intensive. Mining serves two purposes. First, miners use software algorithms to add transaction records to bitcoin's public ledger of past transactions and verify legitimate bitcoin transactions. For their efforts, bitcoin miners get transaction fees. In addition, if the miner finds a new "block," the miner is awarded new bitcoins. A finite number of bitcoins can be mined (21 million, based on the mathematics underlying bitcoin mining).

You can buy bitcoins online and at exchanges, but you don't get a physical paper or coin in exchange. Instead bitcoin exists in a "digital wallet." The value fluctuates, and in fact is "extremely volatile, and subject to wide price swings," according to the alert.

As a result, both regulators and speculators have been drawn to this virtual currency. Speculators are attracted by the possibility of outsized returns (and, as with any speculative "investment," there is a potential for outsized losses).

And regulators raise warnings. Let me quote further from the alert.

"Buying, selling and using bitcoins carry numerous risks:

"Digital currency such as bitcoin is not legal tender. No law requires companies or individuals to accept bitcoins as a form of payment. Instead, bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless.

"Platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can - and have - lost money.

"Bitcoin transactions can be subject to fraud and theft. For example, a fraudster could pose as a bitcoin exchange, intermediary or trader in an effort to lure you to send money, which is then stolen.

"Unlike U.S. banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to digital wallets.

"Bitcoin payments are irreversible. Once you complete a transaction, it cannot be reversed. Purchases can be refunded, but that depends solely on the willingness of the establishment to do so.

"In part because of the anonymity bitcoin offers, it has been used in illegal activity, including drug dealing, money laundering and other forms of illegal commerce. Abuses could impact consumers and speculators; for instance, law-enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off the ability to use or trade bitcoins."

To read the Investor Alert, go to http://tinyurl.com/y94xt7s2.

Also of interest is the bitcoin index (NYXBT).

On another note, not connected with the EFT, the Securities and Exchange Commission suspended trading of the securities of a bitcoin company incorporated in Canada from Aug. 24 through the morning of Sept. 7. The reason: "Concerns regarding the accuracy and adequacy of publicly available information about the company including, among other things, the value of (the company's) assets and its capital structure."

You can read more at the following link: https://tinyurl.com/ybxehpjp.

Should you buy a speculative ETF based on soaring past performance? My regular readers know the answer: Only if you are a gambler who can afford to lose the entire investment.

Julie Jason, JD, LLM, a personal money manager at Jackson, Grant of Stamford, Conn., and award-winning author, welcomes questions and comments to readers@juliejason.com.


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