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Bitcoin shows big returns, but remains a risky prospect for investment

What’s the best-performing exchange-traded fund (ETF), 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 in July. It 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).

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 Financial Industry Regulatory Authority (or 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 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.

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 regulators raise warnings.

“Digital currency such as bitcoin is not legal tender,” the alert warned. “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.

“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.

“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. ”

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

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 is a personal money manager at Jackson, Grant of Stamford, Conn., and an award-winning author. Contact her at readers@juliejason.com.


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