The Crypto-Currency-Coaster. You must be this tall to ride…
Rollercoasters are thrilling; they are exciting but let’s face it, when we get older, our tolerance for being banged around at high speed is a lot less than when we were younger. Bitcoin, and all things crypto-currency, have been doing their best lately to reenact the sensation of the coaster clicking up the track and the following sensation of your stomach dropping out from underneath of you. With single day prices swinging as much as 40% (12/21/17), investors are indeed having a wild ride.
Unless you actively avoid the news, it is nearly impossible to not see the headlines around crypto-currency investing, hearing about overnight millionaires and the lengths that some folks are going to get in on the mania. The allure of a get-rich quick opportunity is tempting, at best, however playing in the crypto-currency market with your wealth is akin to gambling your nest egg away in Vegas minus the complimentary beverages.
What is it?
For the uninitiated, crypto-currency is a form of virtual or digital currency that allows individuals to transfer money between people directly without a bank or other intermediary. Bitcoin currently is king of the hill, however other currencies like Etherium and Litecoin are gaining in popularity. The appeal of a digital currency is that it lacks a central management or authority. They aren’t tied to a government and theoretically should price more in line with traditional economics i.e. supply and demand. Each transaction of the currency is accounted for in a public ledger, called the Blockchain in which currency participants decipher code to confirm the transactions legitimacy. This technology allows for a check and balance to the currency and provides the means for anonymous, encrypted money movement.
Right now, we are seeing a herd mentality taking place with everyday folks that have no place doing so, flocking into Bitcoin, and given the tumultuous nature of crypto-currency pricing, it’s likely that we are seeing the forming of a pretty large bubble.
Since the beginning of 2017 Bitcoin has risen nearly 1000% and Etherium and Litecoin have followed similar growth patterns as well. However, just before Christmas, prices have plummeted, wiping away investors’ paper gains and reminding them of the speculative nature of currency investing.
Opinions on crypto-currency are polarizing. Many analysts feel like the price will continue to grow almost unchecked, and others feel like it’s a farce and that the craze will pass. Regardless of the position on investing in the currency, the market agrees that the Blockchain technology is attractive and could potentially be integrated into the financial services world and other industries.
What are the Risks?
With all investments, there is the potential of loss and with crypto-currency, the risks also bring in a different element that traditional stocks or bonds don’t have. Anonymity is crypto-currencies marquee feature, and since the inception of Bitcoin, it has been strange bedfellows with illegal behavior over the internet - a quick Google search on the Silk Road can give you a crash course.
Here’s a few risks to consider:
1. Regulatory – there is a looming question of legality, tax and legitimacy. Some countries have taken measures to make crypto-currency widely acceptable, others are on the fence. Currently, there is no regulatory standard for reporting earnings or what tax rates could look like on gains. But with the amount of people clamoring to get in, it’s a strong bet that the congress and the IRS will be working to figure out these questions in the near future.
2. Economics - Access to the blockchain technology has reduced over time to those that can afford massive computing costs which puts more controlling power in countries, corporations or others that want to influence the currency. Yes, I know that it sounds like a conspiracy theory primer, however, this is a currency that was built on trading in secret and hiding in plain sight.
3. The Internet – Coinbase, the most prominent exchange for Bitcoin, halted trades during a massive price correction due to overwhelming internet traffic and demand, for nearly a day, which might as well be an eternity to the crypto-world. The Bitcoin exchange YouBit, recently was hacked and lost $35 Million in assets and have since filed for bankruptcy. While investors are expected to be repaid, this will take time and is still uncertain. Two other crypto-currency exchanges were hacked in this year and last that resulted in huge amounts of Bitcoins disappearing into thiefs’ hands – Nicehash lost $70 million this year and Bitfinex lost $60 million in 2016.
The bottom line – Is Crypto-Currency investing for me?
With all things speculative, the best approach to this investment is limit your exposure to it or avoid altogether. I recommend that you cap your exposure directly to crypto-currencies at no more than 1-2% of your investment assets, and understand that because of the volatile nature of the investment, you could experience significant principal losses.
Compass Wealth Planning private portfolios do not have direct exposure to crypto-currency investments, however, there are many companies that have made crypto-currency part of their own investment and infrastructure strategy. Your current investments may be giving you indirect investment exposure that can be beneficial without the risk of your own personal direct ownership.
While the appeal of a quick buck is tempting, it is important that you stick to your financial plan. Keep your risk tolerance and attitude towards losses at the front of your mind, because while the ride up is exhilarating, the ride down can be downright scary.