Bitcoin Is Crashing…

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“It’s not real money!”

My coach was now yelling over the sound of the wind through my helmet and our bike wheels humming on the road…

“Can you buy Dunkin Donuts with Bitcoin? How about a new tire for your bike? If you can’t buy stuff with it, it’s not real money!”

For the last two weeks, our triathlon team has had a spirited debate over Bitcoin and whether it’s a fad or here to stay. Doug, who was riding alongside, piped in, “Someone bought Super Bowl tickets with Bitcoin… Now THAT’S real money!”

Doug may be a bit biased because he’s currently getting paid to set up a server farm for mining Bitcoin and other cryptocurrencies.

Regardless of whether you side with coach or Doug, you have to admit that the cryptocurrency market is a new unexplored frontier — and the big question is whether these currencies represent real money or not…

It’s NOT Real Money (Yet)

When you look at the function of money — or currency — in any civilized economy, it’s hard to make the argument that cryptocurrencies fit the bill.

The first function or role of currencies is to facilitate transactions. In other words, you need to be able to use the “currency” to buy and sell things. And on that front, Bitcoin is severely lacking.

Yes, if you find a buyer willing to fork over Super Bowl tickets for a couple of Bitcoin, you should probably take him up on the offer. But for most everyday transactions, a cryptocurrency simply won’t cut it.

But it may not always be this way…

Because some payment processors like Square (SQ) and others are likely to start allowing merchants and individual sellers to accept Bitcoin in payment for products and services. If big credit card companies eventually jump in and start clearing crypto transactions, the role of cryptocurrencies will advance. And then we’re getting closer to a real currency!

Of course, the ultimate test for a currency is whether you can pay taxes with the currency. Since governments can levy taxes denominated in their own currency, fiat currencies like the U.S. dollar have a necessary role in society — because you can’t legally stay in the economy long-term without possessing at least enough U.S. dollars to pay taxes.

Some countries have experimented with accepting cryptocurrencies as payment for taxes. But we’re a long way from this being widely accepted.

A second test for “real money” is whether the currency is a reliable storage of value.

Just look at the Bitcoin chart below and tell me whether this value is “reliable.”

Over the last two months, the price of Bitcoin has plummeted from a high above $20,000 to a recent price near $7,525. That’s more than a 60% decline in just a few weeks!

Yes, there are other “true currencies” that have lost value quickly like Bitcoin, but they’re usually associated with banana republics like Zimbabwe.

The point is that as long as cryptocurrencies remain unstable — and as long as you can’t buy products and services (or pay taxes) with them — it’s not real money!

How to Make “Real Money” From Bitcoin

While I agree with my coach’s “it’s not real money” statement, I love the fact that Doug is still making money from cryptocurrencies. In my opinion, he’s doing it the right way.

Instead of getting caught up in the hype of buying and selling cryptos (that swing higher or lower at a moment’s notice), Doug is making a living by setting up and maintaining the servers that handle cryptocurrency transactions.

It’s a lot like the Wild West gold rush days!

There are a lot of speculators who will make and lose fortunes. But the people who really profited from gold rushes were the general store owners and wagon makers who sold supplies and equipment to the speculators.

In today’s market, there is still a lot of opportunity to profit from owning the companies that help service the cryptocurrency markets. I’m talking about payment processing stocks like Square, along with semiconductor companies that are enjoying high demand from server farms like the ones Doug is setting up.

There are plenty of ways for smart ways for investors to tap into the cryptocurrency craze — even while crypto currencies are falling in value. The only “downside” is you’ll probably get paid in good-old American dollars instead of Ethereum.

Now, let’s shift gears and take a look at the five things you need to know this week…

5 Must Knows for Monday, Feb. 5

Market Selloff — The market sold off heavily last week as worries over interest rates spread quickly. And as of Monday morning, the selloff continued as the MSCI Asia Pacific Index dropped 1.5%, Japan’s Topix fell 2.2% and European markets have traded lower throughout the morning. However, we here at The Daily Edge recommend staying calm and staying allocated throughout selloffs like this. Although Friday’s 2.5% selloff seems major, we’ve had 82 selloffs between 2% and 3% in the last 3 years — and the bull market continued higher after every one.

Goodbye Yellen — This morning at 9:00 a.m. ET, Jerome Powell was sworn in as the 16th chairman of the Federal Reserve. Powell, 65, certainly has his work cut out for him as he takes over during the 2nd longest bull market in history and with interest rates still at historic lows. During his term, expect Powell to implement similar policies to Yellen with the addition of financial reforms.

Apple Woes Continue — Over the weekend, news broke detailing a widespread issue that arises when answering calls on Apple’s iPhone X. Users describe the problem as a 6-8 second delay in when their phone starts ringing and when they can actually click to accept the call. This problem comes on the heels of last week’s earnings report when the company issued guidance below analyst expectations and multiple reports of weak iPhone demand. The stock is now down more than 11% in 3 weeks.

Earnings Roll On — This earnings season enters its fifth week as we’ve got another strong lineup of companies reporting. On Tuesday, General Motors and Disney report. On Wednesday, Tesla, Twenty-First Century Fox and Humana report. And on Thursday, Thomson Reuters, Phillip Morris and Nvidia report.

Government To Kick The Can (Again) — This Friday at 12:01 a.m., the short-term funding agreement that Congress passed 3 weeks ago expires. As of today, Congress is expected to pass another short-term bill that would extend funding until March — thus kicking the can further down the road. Standing in the way is Trump’s demand to secure immediate funding for a southern border wall and Democrat demands for action on DACA “Dreamers.”

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge
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