My Two Cents on Crypto

I am not what you would call an early adopter. I can remember having conversations where I said I would never text or get a smartphone, but eventually, I came around once I understood the benefits.

My most recent “come around” is on cryptocurrencies. Early on, I was an extreme skeptic, but now that I’ve learned more and seen the use cases, I’m slowly becoming a believer in some – but not all – of the myriad of cryptocurrencies across the world.

Cryptocurrencies are digital or virtual currencies that, based on the way they’re created, are nearly impossible to counterfeit. A great description can be found here.

As a disclaimer, I have never purchased a crypto currency personally and I have never been able to purchase them for clients. That being said, I have talked some clients through the purchase process outside of their regular investment account.

The original use cases for crypto – specifically Bitcoin – were not confidence inspiring. Due to their untraceable nature, often cryptocurrencies were used to complete illegal transactions. It is still the case that if a company falls victim to a ransomware attack, payment is requested in cryptocurrency, usually Bitcoin. In 2020, over $1 Billion in Bitcoin was seized from the online black market site “Silk Road,” which the FBI shut down in 2013.

Theft and hacking was – and remains – a problem in the crypto space as well. With the digital nature of cryptos, it is almost impossible to prove that someone stole your coins. There have been countless stories of digital wallets – either the entire site or an individual’s wallet – getting hacked and the contents vanishing without a trace.

The crypto space has matured into a volatile investment vehicle – though less volatile than what it used to be. Bitcoin itself has had multiple drops of greater than 50%, some more than 90%, in its short lifetime.

The benefits to cryptocurrencies are the potential investment returns. The Bitcoin chart, as shown below, has plenty of peaks and valleys, but the overall trend is up and to the right – substantially!

There are also some benefits to crypto’s anonymous ownership, especially for those living in countries with totalitarian regimes. That benefit is much less valuable in countries like the US, however.

That’s a short history lesson, but what do I think will happen in the future?

I think Bitcoin and Ethereum are likely to survive: Bitcoin because it is the best investment vehicle based on current and future scarcity and Ethereum because it has the most transactional use cases. The rest of the panoply of products, to me, are this generation’s Beanie Babies or Pogs. They’re a fad investment and the bubble will burst eventually.

I think the majority use cases will still be for investment and, in certain countries around the world, avoidance of authority. I don’t think, under current regulations, that using cryptos for purchases makes any sense. To make a purchase, for example when Tesla was accepting Bitcoin as payment, the buyer realizes capital gains on how much the value of the Bitcoin has risen as well as sales (and potentially other) taxes. On top of that, the investor will miss out on any additional gains in the value of each coin. It becomes very expensive money.

There are regulatory changes coming – and fast. Currently, cryptos fall into a bit of a regulatory grey area, but I expect that loophole to be closed soon. Once that happens, and depending on the designated regulator, there could be seismic shifts in the cryptocurrency arena, including tying holdings to a taxpayer ID number, making it easier for the IRS to track and tax transactions.

I reserve the right to change my mind when the facts change down the road, but right now I do think there are some reasons to hold cryptocurrencies in investment accounts. There is enough risk, however, to keep a very close eye on your holdings.

Photo by Executium on Unsplash