There's a lot of talk about cryptocurrency lately. Whether you're for it or against it, chances are you've heard of Bitcoin, Ethereum, and other popular forms of digital currency. Cryptocurrency has become a hot topic in the investment world over the past few years. What exactly is cryptocurrency?
When it comes to cryptocurrency, there are a few things you need to know. First and foremost, cryptocurrency is a digital or virtual currency that uses cryptography for security. It is not issued by any central authority, making it decentralized. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. There are several reasons why cryptocurrency may be appealing to investors.
Let’s look at the pros and cons of investing in cryptocurrency:
- It has the potential for high returns. The price of Bitcoin has grown exponentially since its inception, rising from less than $0.01 to over $11,000 at its peak in December 2017. Ethereum, another cryptocurrency, has also seen tremendous growth, rising from around $0.30 in early 2017 to over $700 by December of that year.
- It is not subject to the same regulation as traditional assets like stocks and bonds. This makes it a more speculative investment, but one that could offer higher rewards. It also continues to grow in popularity and usage. Because it is not a regulated security, I am allowed to educate clients on the topic, but am not allowed to recommend or buy it for clients.
- There are also potential tax benefits of cryptocurrency. For example, if you hold your cyber currency for more than one year, you may be eligible for a long-term capital gains tax rate that is lower than the ordinary income tax rate. This could result in significant savings on your taxes. Speak with a tax advisor to learn more about the potential tax benefits of investing in cyber currency.
- However, cryptocurrency isn't without its risks. One major risk is the extreme level of volatility associated with cryptocurrency. The prices of cybercurrencies can fluctuate wildly, and investors could lose a significant amount of money if they purchase when prices are high and sell when they drop. It is also still a relatively new asset class, and there is not a lot of history to go on when making investment decisions. This lack of history makes cryptocurrency a more speculative investment, which could either pay off handsomely or result in sizable losses.
- Cyber security is also a potential risk. Cyber criminals using cryptocurrency to hack and steal your personal information. Cyber security can help prevent these cyber-attacks but if you’re not diligent about your cyber security, this could open you up to risks.
- Cryptocurrency lacks regulation. Bitcoin is not backed be either a government or any physical asset such as gold. Major exchanges are located around the world, and the decentraleized nature of the system makes it more challenging for government regulators to get a handle on it. Unlike accounts at FDIC-insured banks, there is not protection for possible loss from a digital wallet. Moreover, a fraudster could pose as a crypto exchange, intermediary, or trader in an effort to lure victims to send money, which is often stolen.
Speculation hasn’t been limited to the currency itself. Much like the Internet did in its early days, Bitcoin has spawned an entire ecosystem of startup companies and venture capitalists that are building out cryptocurrency technologies and products. As with early Internet companies, such ventures are likely to involve a high degree of uncertainty of risk.
Investing in cryptocurrency is not a decision to be made lightly and depends on your investment goals and your tolerance for risk. If you're looking for high returns and are willing to take on more risk, cybercurrency may be a good option for you. But if you're more conservative with your investments, you may want to steer clear of this new asset class.
In summary, while cryptocurrency may be attractive because of the growth potential, I consider it highly speculative and unstable. As many of my clients through the years can attest, my investment selection for portfolios tends to shy away from speculative high-risk investments, especially those with a limited track record.
I hope you found this information useful. If you would like further information or discuss my thoughts in further detail, please feel free to reach out to me.