# One Man's Trash—Another Man's Treasure

Lost: An \$8 Million Thumb Drive

Just how easy is it to lose \$8 Million? Easier than you might think if your war chest consists of virtual currency stored on a thumb drive. Just ask James Howells of the UK. You see, Mr. Howells was one of the tech geeks who became a "miner" of Bitcoins. This may require some explanation. Bitcoin, as you may be aware, is a form of virtual currency that can be used to facilitate transactions over the internet, legal and otherwise. Bitcoin is not backed by actual dollars or anything else commonly associated with currencies such as silver and gold. The value of a bitcoin is purely a measure of what somebody else is willing to pay you for it. Bitcoin has been called a cryptocurrency because it uses cryptography to secure transactions, and thus is commonly used for dodgy things. Bitcoins are created (mined) by computers running programs to solve massively difficult mathematical problems. A good comparison would be finding prime numbers that are 100 digits in length. To be clear, there is no Bitcoin company--It is open-source and peer-to-peer with "volunteers" who track transactions in exchange for fees received in Bitcoin. The maximum number of bitcoins that can theoretically exist is 21 million. To date, a little over 12 million have been mined.

Since it began in 2009, the dollar value of a bitcoin has risen from zero to \$1,054 as of 12/3/2013, and poor Mr. Howells had 7,500 of them on a thumb drive that he accidentally threw away. Today, it sits under a mountain of garbage at a landfill site in Wales. An entirely different type of mining would be needed to find it. To illustrate just how volatile the value of bitcoin is, when Mr. Howell's sad story was reported last Friday (November 29th), the value of his loss was over \$9 million. As Henry Blodget pointed out, the fair market value of a bitcoin could be anywhere from a penny to a million dollars. It is completely arbitrary. Are we in the middle of a Bitcoin bubble? The answer to that will only become apparent in hindsight.

If you are chomping at the bit to get your virtual hands on Bitcoin, please pause to consider the history of things that inexplicably experience an exponential increase in price over a short period of time. Beginning with Dutch tulip mania in the 17th century and ending with Miami Beach condominiums in 2007, it has never ended well for late buyers. If you are thinking of becoming a bitcoin miner, please rest assured that the low-hanging fruit has already been picked. Unless you have an extremely powerful computer or network at your disposal, you will be lucky to get a fraction of a bitcoin.

A few months ago, we published an article addressing the important distinction between possessions and investments. From everything we have seen about Bitcoin, it belongs in the "possessions" category even though their existence is primarily limited to the virtual world. We say "primarily" because there is now a company that sells physical bitcoins, each having its own Bitcoin address and "private key". The coin even displays Bitcoin's motto "vires in numeris" which is Latin for "strength in numbers", an allusion to the strong level of encryption underlying Bitcoin. For us at IFA, strength in numbers refers to the long-term historical data that tells us the risks that are worth taking. That means we will have to take a pass on Bitcoin.