Should I Buy Cryptocurrency?

Welcome to this month's Ask the CFP. This month’s question is, “Should I buy cryptocurrency?” It’s safe to say that most people know what Bitcoin is today, even if they don’t fully understand how it works. Although Bitcoin is by far the most popular cryptocurrency today, there are over 4,000 different cryptocurrencies around the world. With this relatively new market valued at billions of dollars, should you put your dollars at risk and buy crypto?

While the technical details of cryptocurrency are beyond the scope of this article, let’s first remember that these are digital assets driven by supply and demand. The point of these digital coins was to create a currency system that doesn’t depend on a centralized bank such as the Federal Reserve. Some holders of cryptocurrencies are attracted to their relatively higher degree of anonymity, substitution for traditional money issued by government banks and their perceived value as a hedge against inflation. While there are indeed some aspects of cryptocurrency that are attractive compared to fiat currencies like the US dollar, the crypto market is still in an early stage with many unknowns.

The Federal Reserve Bank is considering establishing a digital currency of its own

First, while I’m sure there are examples out there, I have yet to personally meet anyone that has actually used crypto to buy anything. I know many people that own cryptocurrencies but using them to buy a car or a sandwich is another story. The success of this industry depends on people to use, trust and rely on these digital assets as a means of payment. Second, if someone has an unrealized gain on their crypto holdings and decides to exchange it for another crypto, exchange it to dollars or use it to buy something, they must pay taxes on the gains. This tax consequence may be a deterring factor to selling, exchanging or spending crypto. Third, regulation of crypto is uncertain and continually evolving. The Securities and Exchange Commission currently views both Bitcoin and Ethereum, the two largest cryptos by volume, as commodities. This makes sense because, like gold, silver and palladium, cryptos are valued by supply and demand. They can experience wild swings in value and they don’t pay a dividend, produce a product or have employees like a company would. With these attributes, they’re essentially a commodity.

Some cryptos like Bitcoin and Ethereum have certainly experienced rapid growth and we've all heard the stories of people who have either become wealthy or lost tremendously because of it. While it’s hard to say what may happen with these two examples in the future, it’s very likely some form of cryptocurrency is here to stay. The Federal Reserve Bank is considering establishing a digital currency of its own for reasons such as instant electronic payments. This would also put pressure on the adoption rate of other cryptocurrencies. Overall, remember that cryptos are not an investment. They’re speculative and you should expect volatility if you decide to buy them.

If you would like more information on this topic, we also have a report with greater detail, including ways you can access cryptocurrencies if you’re interested. Just send an email to [email protected] and we’ll respond with the report.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation. Moneta does not offer investment advice regarding cryptocurrencies and does not bill clients for the education it may provide them on crypto markets. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional information and analyses comes forth. Nothing contained herein represents an offer to sell or buy cryptocurrencies or any other commodities or securities, nor does it represent any specific recommendation.