Digital currencies can be created at any time.
Which is why the number of cryptocurrencies available over the internet is approaching 1,000 and growing.
The most popular and considered the first digital currency is Bitcoin. It also happens to be the most valuable.
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In fact, just this past week, Bitcoin’s market value hit $96.7 billion according to Coinmarketcap.com. Its market capitalization has now surpassed major stocks such as Goldman Sachs (GS) and Morgan Stanley (MS).
For something that’s virtually created out of thin air and really has no intrinsic value, it’s quite remarkable to think that people are now paying more than $5,000 to own just one Bitcoin.
Of course, many folks are skeptical of the cryptocurrency "revolution" and think it’ll end very badly (think "Dutch tulip bulb mania").
One such critic is Jamie Dimon, the CEO of JPMorgan Chase, the largest bank in the United States.
“Bitcoin is a fraud," Dimon said recently. "It’s just not a real thing, eventually it will be closed. Currencies have legal support, it will blow up.”
Mr. Dimon is not the only prominent figure who feels that way. Ken Rogoff, Professor of Public Policy and Professor of Economics at Harvard University, thinks that the price of Bitcoin will “collapse.”
“Increased efforts from governments to rein in virtual currencies could eventually contribute to a decline in speculative interest in the digital asset," he said. "The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates. There’s no reason to expect that virtual currency to avoid a similar fate.”
Rogoff may be on to something...
Regulators in mainland China and South Korea have recently begun cracking down on platforms that allow people to buy and sell digital currency.
China also moved to ban Initial Coin Offerings (ICO), a relatively new scheme used by startups to raise capital and circumvent the rigors and regulations imposed by venture capitalists and banks.
It may be only a matter of time before the lack of consumer protections compels the U.S. government to intervene in the American cryptocurrency marketplace.
Worse, many legal experts believe that Initial Coin Offerings are in direct violation of the Securities Act of 1933, which regulates the offer and sale of securities.
Whether or not that interpretation ultimately holds sway, the lack of regulation on digital currency exchanges should give investors pause.
In 2014, Tokyo-based Mt. Gox, a bitcoin exchange handled 70% of all Bitcoin transactions worldwide. It abruptly suspended trading, closed its website and exchange services and filed for bankruptcy protection.
The company announced that approximately 850,000 Bitcoins (an amount valued at more than $450 million) belonging to its customers had gone missing. Today, the same amount of Bitcoin would be valued at more than $4 Billion.
Although roughly 200,000 Bitcoins were eventually recovered, account holders suffered heavy losses. The exchange and its principles were charged with fraud, embezzlement and manipulating the exchange’s computer system.
Today, with Bitcoin bigger than ever, investors would do well to wonder if another Mt. Gox is waiting to blow up?
Hard to say, but this much is clear. Digital currencies remain a new frontier… a wild, wild west. For that reason, the order of the day is caution.
With Bitcoin’s valuation about to pass $100 billion, it’s likely to attract greater scrutiny from governments, in particular from the United States, which currently enjoys having the U.S. Dollar as the world’s currency reserve.
For me, the lack of regulation is the biggest hurdle to directly investing in Bitcoin or any other digital currency.
That said, here’s what does get me excited about Bitcoin.
The underlying technology! You see, it’s the technology driving these digital currencies that has the real potential to create intrinsic value. I’m referring to Blockchain, the software platform at the core of digital currencies.
The Blockchain is basically an electronic ledger that records all Bitcoin transactions. What makes it an attractive alternative to other traditional payment or transaction systems is that the database is decentralized, transparent and offers layers of privacy.
Even some of the harshest critics of Bitcoin recognize its value.
In a recent interview, Christine Lagarde, the head of the International Monetary Fund, said, “it’s important to look at the broader implications of technologies like digital currencies.”
She also didn’t rule out the IMF creating its own cryptocurrency to incorporate Special Drawing Rights, a currency created by the fund to serve as an international reserve asset.
“What we will be looking into is how this currency, the special drawing right, can actually use the technology to be more efficient and less costly.”
While Bitcoin really rests on no intrinsic value, a digital currency created by the IMF backed by its members' reserves would have a far more credible standing in the digital marketplace.
Blockchain technology will likely be the next great disruptor to the financial services industry.
Right now, it takes two trading days to settle a stock transaction. The Blockchain could make possible same-day settlements. This would transform how broker/dealers run their back offices.
Or take the real estate industry. If a decentralized ledged of real property can be tracked in a reliable and transparent manner, the need for title searches and insurance could go the way of the buggy whip.
These are just a couple of examples of how the technology behind Bitcoin could become a transformative force.
So... How to we play this?
Bitcoin and the rest of the cryptocurrencies need massive computing power to run the Blockchain software. And it’s been a great tailwind for semiconductor companies that make really powerful graphic processors.
One of those companies benefiting from the emergence of cryptocurrencies is Nvidia (NVDA), which cut its teeth as a manufacturer of graphics chips used in video games.
The company has also been aggressively gaining business in artificial intelligence and autonomous driving.
And like Bitcoin, NVDA has been on a huge run, up nearly 200% over the past twelve months.
For investors looking to gain exposure to Bitcoin or to the Blockchain technology, we believe that NVDA is a better way to play it because it provides earnings power and intrinsic value over that of Bitcoin. NVDA is also well positioned to benefit from its other core businesses making it a compelling investment idea.
Our recommendation is to buy or accumulate on near-term weakness and maintain it as a core holding in your portfolio.
Talk to you later!
Read the original article on True Market Insiders. This is a guest post by True Market Insiders, an independent investment research company based in Boca Raton, FL that delivers investment insight, education and data throughout the world. Click here to receive the True Market Insider eLetter in your inbox twice a week, for free. Copyright 2017
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