Virtual currency, real lessons
Starner, like many potential bitcoin buyers, was mostly looking to diversify his own personal portfolio but found few resources to help him understand the risks or rewards the cryptocurrency might bring.
“Unlike mutual funds — where there are resources out there like Charles Schwab, where you can just set up an account, invest and feel comfortable with it — the whole idea of investing in bitcoin was a little intimidating to me,” said Starner, who works in Harrisburg for marketing firm Advantage Solutions.
Chip Rutan, president of New Cumberland-based multimedia production company Rutan Productions, found a similarly frustrating lack of resources.
“I bought some bitcoin earlier this year, and the thing I noticed was there was really no one around to help me,” said Rutan. “I made some mistakes, I lost some money, mostly because there was no one really around to help me learn what I was doing.”
That’s why Rutan started Bitcoin Navigators, a group of prospective bitcoin buyers and investors hoping to help each other chart the murky waters of the relatively new technology.
“The thing I found that builds trust the most is face-to-face meetings,” said Rutan. “When you’re dealing with bitcoin, you could be dealing with someone from Africa, Indonesia, all over the world because it’s not a currency that’s specific to a country.”
The group approach appeals to Starner.
“I think there’s great potential in the bitcoin and cryptocurrency market, and just knowing Chip’s personality, I know that he really just wants to help people navigate that part of the exchange,” said Starner, who first met Rutan through a church group.
Despite frequent headlines linking bitcoin to criminal activity or uncertain financial markets, the digital currency’s volatility and growing value have attracted more and more interest from personal investors like Starner and Rutan. But the often confusing nature of bitcoin has kept more people away than the currency’s use by online drug markets and hackers.
However, the new currency is slowly gaining ground. While the value of a bitcoin hovered between $500 and $1,000 per coin at the currency’s start, the last year has seen a sharp increase in demand and major investment by larger firms in the technology necessary to “mine” bitcoin. Because bitcoin is not regulated by a central bank like the U.S. dollar, its value is only limited by its supply and the increasing difficulty of obtaining it. As of early November, the price of bitcoin had surged past $7,000 per coin and showed little sign of stopping.
It’s a gold rush many find hard to ignore.
“I talk to financial planners and I was surprised — two of them actually own bitcoin,” said Rutan. “All of these financial planners are aware of it because places like Fidelity Investments are offering it as an option for portfolios for clients.”
Rutan notes older investors are often pushed away by the currency’s digital environment. “It’s the younger people who are gravitating towards it more so than the older generations,” he said.
Much of the uncertainty around bitcoin comes from the infrastructure supporting it. Bitcoin trades and exchanges are hosted on a blockchain — the term for the public ledger that shows every bitcoin purchase or trade. And despite massive growth in recent years, blockchain technology and the exchanges using it still face a number of questions about their security and fidelity.
So said Benjamin Wallace, executive vice president of operations and technology at Shippensburg-based Orrstown Bank, which began monitoring its customers’ use of bitcoin shortly after the currency emerged.
“These exchanges are facilitated by private companies and, while many are good companies, they are startups with venture backing,” said Wallace, who pointed out money turned into bitcoin is not insured by the Federal Deposit Insurance Corp., the federal agency that insures traditional bank deposits. While Bitcoin exchanges have private insurance that covers very limited circumstances of loss, the entire insurance framework around bitcoin is new and has significant limitations.
“The supervisory nature of these companies is still uncertain. They don’t have the Federal Reserve or OCC (Office of the Comptroller of the Currency) supervisory structure like banks have,” Wallace said. “Many of these exchanges are trying to conform to existing regulations because many of them, at least, want to legitimize their exchanges. But the regulation of the industry is still very new and differs by state.”
Wallace suggested prospective buyers should be wary of putting too much trust in what is still a very new technology.
“The magic question is, ‘What happens if you have an exchange or bitcoin company that is somehow is compromised or delegitimized?’” he said. “You may in fact not have insurance against your bitcoin assets, and a significant amount of money could be lost with no recourse.”
Such a nightmare scenario was realized in 2014 when Mt. Gox, then the largest bitcoin exchange in the industry, shuttered overnight and lost over 850,000 bitcoins valued at $473 million.
Problems can arise in properly storing bitcoin as well, such as it did for a blogger who lost $30,000 in bitcoin after forgetting the password to his digital wallet.
Horror stories like these — combined with the increasing value of bitcoin — are why most Pennsylvania cities now feature a group like Bitcoin Navigators filled with amateur investors hoping to help each other parse the prospective dangers and benefits. Alongside Bitcoin Navigators is Bitcoin Allentown, Bitcoin Philadelphia and the Bitcoin Club at Penn State University.
“One of the things about Bitcoin Navigators is teaching you how to get it but also how to store it,” said Rutan, acknowledging the risks that come with the currency. “My best recommendation is you can start with as little as $10 or $20. I would never tell someone to put something they can’t afford to be without into bitcoin. But I would tell somebody to start with something small and try and follow it and learn.”