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Northwest OH Legal Blog

Tuesday, March 20, 2018

Should You Ever Invest in Bitcoin?

Chances are good that most of us will never have a logical reason to use Bitcoin. Certainly, it would never be recommended as an investment in a qualified retirement or health and welfare benefits plan. Boards of Trustees and corporate Retirement Committees would be greatly weakening their vow of due diligence by even considering Bitcoin in their plans. It would even be unusual for Bitcoin to be part of non-qualified executive compensation benefit plans unless such executives were heavy-duty risk seekers.  But that doesn’t eliminate the need for some basic Bitcoin savvy or whether it should ever factor into our updated financial investments or short-term retirement goals. 

In its simplest terms, Bitcoin is a digital form of currency---no coins are minted and no bills are printed.  There is no government or institution (like a bank) that oversees or controls it.  Instead of using names, usernames or tax ID numbers, buyers and sellers are linked through personal and public encryption keys. Bitcoin isn’t issued from the top down like traditional currency is; however, it is “mined” by high-powered computers connected to the Internet.  Confused yet?

Mining of Bitcoin is done by performing a combination of complex math and recordkeeping operations.  When someone sends a Bitcoin to someone else, the network records this transaction along with others in a “block” and collectively blocks are termed the “blockchain” that is part of the record of all Bitcoin transactions.   Then computers running special software –the “miners”—inscribe these transactions on a huge digital ledger.  After that comes the hard part of creating a “hash,” a sequence of code, formed when the blocks are converted by miners.  The miners simultaneously compete using advanced computational skills to be the first to convert these blocks into a hash. The miner who converts the block gets a “fee” of around 12.5 Bitcoins (worth about $100,000 in February 2018). Now, the miners’ fees may be what peaks your 

How the value of Bitcoin is determined is simple—the value is determined according to what people will pay for it, much like stocks are priced.  And because there is no trusted government control or legitimate central authority that monitors the supply of Bitcoins, their “value” is largely left up to interpretation.  That is what produces so much speculation—the “price discovery” process.  The Bitcoin protocol, supposedly established in 2009 by Satoshi Nakamoto, dictates that only 21 million Bitcoins can possibly be mined and about 12 million have been mined already.  So, like gold and other precious metals, there is a limited supply; however, Bitcoins have no intrinsic value, adding to the confusion.

In case you are intrigued about this Bitcoin to parlay your retirement nest egg or revive your retirement goals that plummeted in 2008, be keenly aware that Bitcoin investments carry heavy risks. The financial value is so volatile that it can swing hour to hour and most of us don’t have that kind of time to constantly monitor this phenomenon. Additionally, the anonymity of this “currency” can’t be traced due to the use of heavy encryption so you literally have no clue who you are buying from or to whom you are selling your Bitcoins. This gives way to a heavy risk for money laundering and ten arrests were made by Netherlands’ authorities in 2016 for just that.  In addition to money laundering, theft of Bitcoins is prevalent. Mt. Gox, an established, legitimate Bitcoin exchange in Japan “lost” 750,000 Bitcoins in 2014 and hackers allegedly stole $60 million from the NiceHash exchange group in December 2017.   The worst part is that there are few alternatives for pursuing stolen Bitcoins or challenging shady transactions to recover losses because once a transaction hits the blockchain, it’s final.  But at least you now know why you may want to steer clear of the popular Bitcoin craze when considering a modernization of your retirement assets.  This knowledge does make great party conversation though.


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With an office located in Toledo , OH Allotta Farley Co., L.P.A. serves clients throughout northwest OH with various legal matters. Areas of service include Allen County, Ashland County, Auglaize County, Crawford County, Defiance County, Erie County, Fulton County, Hancock County, Hardin County, Henry County, Huron County, Lucas County, Marion County, Mercer County, Morrow County, Ottawa County, Paulding County, Putnam County, Richland County, Sandusky County, Seneca County, Van Wert County, Williams County, Wood County, Wyandot County.

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