Should You Invest in Cryptocurrency?

Cryptocurrencies: Should You Invest in Them?

Although Bitcoin and other cryptocurrencies have become very popular, there are some key things that investors should be aware of before they get into them. Before investing in cryptocurrencies, investors should thoroughly learn about the various risks that they can face.

Some of these include the lack of transparency, the volatility of the price, the lack of consumer protections, and the lack of regulation. For investors looking to take advantage of the potential of cryptocurrencies, it is suggested they treat them as speculative assets instead of a traditional portfolio.

What is the SEC's take on cryptocurrencies?

The SEC has been very skeptical of cryptocurrencies. Its chairs have expressed their concerns about the volatility of the asset, the lack of investor protections, and the lack of regulations.

Despite this, Gary Gensler, the current chairman of the agency, has stated that he does not intend to ban cryptocurrencies. The agency has also rejected multiple applications for Bitcoin-related exchange-traded funds.

Will Bitcoin or other cryptocurrencies become the new global currency?

Although it is still too early to tell if cryptocurrencies will eventually become the new global currency, they are believed to eventually become viable due to the lack of regulation and consumer protections. A currency should be able to function as a reliable medium of exchange, a store of value, and a legal tender.

Bitcoin is currently considered a risky asset due to its high volatility and transaction fees. It is also unlikely that it will ever be able to function as a standard medium of exchange or a store of value. Another reason many people are still not accepting cryptocurrencies as real currency is its rising popularity. This is because they believe they are not controlled by governments or central banks.

Can Bitcoin be used as a hedge against inflation?

Since Bitcoin does not have a correlation with the value of various goods and services, its potential as an inflation hedge is still unknown. Throughout 2021 and 2022, the asset experienced sharp price declines and rallies even as inflation data kept rising. It is still not clear if Bitcoin will be able to provide an effective long-term inflation hedge.

How are cryptocurrencies taxed?

The IRS currently considers Bitcoin to be property, not currency. When a taxable event occurs, such as the sale of Bitcoin for fiat money, the exchange of Bitcoin for another asset, or the purchase of a product or service, Bitcoin transactions are taxable. For more information about the IRS's regulations on cryptocurrencies, refer to Notice 2014-21.

Although the IRS currently doesn't require cryptocurrency exchanges to report all of their transactions, a new law passed in November 2021 requires them to do so starting in 2023. The IIJA also requires that the exchange report certain types of transactions, such as those involving $10,000 or more, to the IRS. Although the $10,000 reporting requirement applies to certain transactions, it's important to note that transactions of less than $10,000 are not considered taxable. According to the tax code, income from any source, regardless of its value, is considered taxable even if it's not reported to the IRS. For instance, if an individual sold $500 worth of items at an auction, the buyer would still owe taxes on the $500 even though the Form 1099 did not contain information about the sale.

What are some risks of Bitcoin and cryptocurrencies?

One of the biggest risks investors should be aware of is the volatility of the prices of cryptocurrencies. Due to the high volatility of the market, it's possible that a significant loss could occur when a trade is made at the wrong time. In addition, the lack of regulation and oversight regarding the trading and issuing cryptocurrencies could lead to additional risks.

Another potential issue that investors should be aware of is the potential for cybercrime and fraud. Due to the nature of cryptocurrencies, they could potentially be subject to scrutiny by the FinCEN, an agency that focuses on financial crimes. Bitcoin exchanges have been experiencing computer issues due to excessive demand, and a cyberattack could prevent users from accessing their accounts.

A user's login ID and password are usually required to access an exchange. If this is lost, stolen, or hacked, their access could be denied. Although Bitcoin can’t be stored in physical wallets, it's still possible for them to be stolen, destroyed, or even lost. This makes them an even more risky asset.