Cryptocurrencies and Control

Bitcoin began use in 2009. It was invented by an unknown person, or group of people, using the name Satoshi Nakamoto.

Today, the total value of all Bitcoin is over one trillion dollars. Since the startup of Bitcoin, over 200 other cryptocurrencies have been established, with a total value of over $1.7 trillion. A recent NerdWallet post claims there are over 6700 different cryptocurrencies being publicly traded.

Governments and central banks around the world are starting to take notice. Speculation about the banning of cryptocurrencies has begun. The IRS now requires every tax filing to answer the question “Did you buy, sell, or exchange any virtual currencies in 2020?”  Virtual currency is treated as property in the US, and general transaction principles apply to transactions involving virtual currency.  In plain English, if you use Bitcoin to buy a cup of coffee, this is a taxable transaction, just the same as selling a block of stock. Gain or loss on the bitcoin sold to buy the coffee must be reported on Form 8949.  A cottage industry to automate the reporting of these transactions already exists.

Also, central banks and others want to get in on the cryptocurrency action. They are complaining that Bitcoin creates carbon emissions, is not really a store of value, and unlike gold, has no industrial uses.  All of which are true.

But are the big institutions only now getting interested because they see cryptocurrencies as threats to fiat money?  Maybe so. Governments may also be motivated to control, or even ban, cryptocurrencies, in the name of fighting illicit substance trading, human trafficking and terrorism. On the other hand, governments have a legitimate role in protecting the public from theft and fraud. Hundreds of millions of dollars were lost just in 2020.

Should the average investor have an allocation of their portfolio invested in cryptocurrencies?  There are arguments for and against this notion.

Cryptocurrencies have been exploding in value. Holding a cryptocurrency is thought to be uncorrelated with the risks of holding stocks, bonds, or real estate. Cryptocurrencies are becoming easier to buy, hold and track.

However, governments may regulate or outright ban them. Individuals were banned from owning gold in the US from 1934 to 1974. There is no reason to think the government, at some point in the future, could not ask you to forfeit Bitcoin. The cryptocurrency investor is exposed to fraud and theft without legal and regulatory protections similar to those in force in banking or stock and bond markets.

As always, the precept caveat emptor (let the buyer beware) applies. Cryptocurrencies are not the easy road to riches, even if some have gotten lucky holding them.

Ask yourself: do you really need to take on the additional risks of holding cryptocurrencies? Are you looking to get rich quick, or is the steady realization of your financial goals what you are really working toward?