Cryptocurrencies: Should You Invest in Them?

Cryptocurrencies: Should You Invest in Them?

Bitcoin and other cryptocurrencies continue to grow in popularity, but if you’re thinking about investing in them, there are a few important things you should know first.

In addition to learning the basics of cryptocurrencies, investors must consider a number of risks, including the fact that the most popular cryptocurrencies are volatile in value, the market is not very transparent, transactions are irreversible, there is little or no protection, and regulators have not yet clarified their approach to their regulation. We recommend investors looking to invest in cryptocurrencies treat it as a speculative asset, using funds outside a traditional long-term portfolio.

What is the SEC’s position on cryptocurrencies?

The Securities and Exchange Commission has been generally skeptical of cryptocurrencies, with chairmen expressing concerns that the product is too volatile, investor protections are inadequate, and regulation is inadequate, although the current chair SEC’s Gary Gensler has spoken on several occasions and has stated that he has no intention of denying them. The agency has rejected several Exchange Traded Fund (ETF) applications to invest directly in Bitcoin in recent years.

In August 2021, SEC Chairman Gary Gensler said he was open to the idea of ETFs investing in cryptocurrency futures, but not those investing in the spot market, as the futures market is already regulated by the Commodity Futures Trading Commission. In October 2021, the first two Bitcoin futures ETFs, the Pro Shares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF), were approved and launched. While a few others have followed suit, they are all limited to Bitcoin and Ethereum, as they are the only two cryptocurrencies that currently have active futures markets.

Will Bitcoin or other cryptocurrencies become the new world currency?

We don’t think so until there is proper regulation and consumer protection, but time will tell. To be viable, a currency generally needs three characteristics:

• It can be used as a cheap and reliable medium of exchange;
• It can be a unit of account;
• It can be a store of value and legal tender which is considered currency.

As long as Bitcoin is subject to high volatility and high transaction costs, it seems likely that it will have limited use as a medium of exchange, unit of account or store of value. Another barrier to wider public acceptance as a true currency is that as cryptocurrencies become more prevalent, regulatory risk increases, making them less attractive to investors who see them as a currency that is not led or controlled. by central bank policy. national governments.

Can Bitcoin be used as an inflation hedge?

Since the value of Bitcoin is not currently tied to the value of any basket of goods or services, its value as an inflation hedge is speculative and unpredictable. For most of 2021 and 2022, Bitcoin experienced both strong rallies and sharp declines in prices, even as inflation data continued to climb higher and higher. Whether Bitcoin will prove to be an effective inflation hedge in the long run remains to be seen.

How are cryptocurrencies taxed?

The IRS currently treats Bitcoin as property, not currency. The IRS taxes cryptocurrency transactions when a taxable transaction occurs, such as selling Bitcoin for fiat currency, paying for a product or service with Bitcoin, or redeeming for another asset. Currently, investors are responsible for monitoring cost bases, earnings and other ratios. See IRS Disclosure 2014-21 for instructions or contact your tax advisor.

However, the Infrastructure Investment and Jobs Act 2021 (IIJA), passed in November 2021, requires cryptocurrency exchanges to report cryptocurrency transactions on Form 1099-B starting in 2023. Additionally, the IIJA requires that at least $10,000 on exchanges are in cryptocurrencies. reported to the IRS, as well as the current Form 8300 reporting requirements for cash payment transactions, also starting in 2023. However, it is important to remember that this $10,000 reporting requirement does not mean that a lower cryptocurrency transaction at $10,000 is not taxable. According to the IRS, “all income from any source” is taxable, even if you don’t report it to the IRS. For example, a person who sold $500 worth of items at a flea market would still have to pay income taxes, even if it wasn’t reported to the IRS on a Form 1099.

Are cryptocurrency transactions subject to wash-sale rules?

Tax experts believe that because the IRS currently treats cryptocurrencies as property and not securities, losses are treated differently than losses in stocks and mutual funds, so sales rules generally don’t apply. However, as new rules are proposed and passed, the IRS and SEC are likely to issue new guidance on the matter in the future.

What are the risks of Bitcoin and cryptocurrencies?

financial loss. The prices of Bitcoin and other cryptocurrencies have traditionally been very volatile, and fluctuations can lead to significant losses if sold at the wrong time.

Future regulations. The issuance and trading of cryptocurrencies is currently not well regulated and more scrutiny and regulation is likely to come in the future. US Treasury Secretary Janet Yellen took note of her concerns about the use of cryptocurrencies for “illegal funding”.

Fraud and cybercrime. These have already happened. Given the above concerns, cryptocurrencies could come under scrutiny by the Financial Crimes Enforcement Network (FinCEN) for non-compliance with the Bank Secrecy Act (BSA) and anti-money laundering requirements. Bitcoin exchanges have experienced computer outages due to excessive demand, and since the ledger is kept on the Internet, a large-scale cyberattack could limit access in an emergency, which is unlikely to happen with cash or gold.

Theft or loss. Accessing a cryptocurrency exchange usually requires a login and password. If lost, hacked or stolen, access may be denied or lost. Though rare, bitcoins can be stored in physical wallets so they can be used without a computer; this carries the same risks as all cash currencies: they can be accidentally lost, stolen or destroyed.

Does Schwab recommend investing in cryptocurrencies?

We believe Bitcoin and other cryptocurrencies are speculative investments. We don’t believe Bitcoin fits traditional asset allocation models at this point as it is not a traditional commodity like gold, nor a traditional currency. Bitcoin has no income or revenue. It has no price-to-earnings ratio, price-to-sales