Invest in Crypto?

Few people I have spoken with understand all the intricacies and arcane vocabulary surrounding crypto. Bitcoin was first, launched in 2009 it languished with low volume and relatively low pricing until several years ago as interest slowly gained ground. But beginning around 2020 almost 23,000 ‘me too’ coins were added. Some of these were pranks or jokes, others touted different purposes and functionality (see list below). The notional market value of all crypto today is about $2 trillion and is easily traded on member subscription platforms such as Robinhood. Total market value today across the largest cryptos (over 95% of the total aggregated crypto market value):

Top Ten Crypto Coins:

1. Bitcoin (currency) - $1,230 billion

2. Ethereum (smart contract platform) - $363 billion

3. Tether (stablecoin) - $111 billion

4. BNB (smart contract platform) - $90 billion

5. Solana (smart contract platform) - $66 billion

6. USD Coin (stablecoin) - $33 billion

7. XRP (currency) - $29 billion

8. Dogecoin (currency) - $22 billion

9. Toncoin (smart contract platform) - $20 billion

10. Cardano (smart contract platform) - $16 billion

Regulators have wrestled with how to define crypto to regulate it properly. Is it a currency? Commodity? Security? Asset? Something else? What is it, how does it fit with other products that investors trade?

As a result of the extended discussions and disagreements, crypto fraud flourished among criminals seeking the means to launder money or to scam people, giving crypto a bad reputation. With little to light regulation, anonymity can be protected in these transactions. With any US Dollar transaction over $10,000, that transaction will get a lot of attention, review, and scrutiny, but that isn’t true in the case of crypto. Even North Korea is suspected of using crypto hacks, thefts, and scams to fund their nuclear missile program.

Several large frauds have resulted in convictions, notably Sam Bankman-Fried and his multi-billion FTX crypto firm, and just this week Terraform Labs and CEO Do Kwon was convicted of orchestrating securities fraud involving an algorithmic stablecoin and other crypto asset securities.

But the nascent crypto trading continues to get traction nonetheless, and recently the SEC approved BlackStone to create an Exchange Traded Fund (ETF) to trade Bitcoin - iSHARES BITCOIN TRUST (IBIT) - with over $50 billion in the ETF today. The price of Bitcoin has been as high as $74k and as low as $15k, all within the window of only a year’s time, so the volatility is quite high, meaning the risk of (both) gains and losses is high.

Those who tout Bitcoin (BTC) point to its limited (finite) supply. Only 21 million will ever be available and over 20 million have already been produced (or ‘mined’). When there is sufficient demand for a product, supply limitations often mean the price increases, especially if demand continues to grow.

What can we compare Bitcoin to in terms of other investment choices?

We begin with what crypto ‘isn’t’: Crypto does not generate revenue or earnings, neither does it pay interest or dividends. So crypto is unlike a stock or a bond. Investors hope its market value will increase and they will make a gain on their investment, taxes will be assessed on any gain, and gains or losses are only recorded when ‘realized’, in other words the investment must be sold. The investor then receives annually a 1099 document that reflects crypto purchases and sales along with the gains and losses for tax filing purposes.

The best characterization of crypto is as a speculation, much like gold. Gold has been around for a much longer time and is used to make jewelry and is useful in industrial applications too, so the comparison is close but incomplete. Speculation can be tantamount to gambling, particularly if the investor doesn’t have experience and understanding, along with an underlying reason why he or she believes crypto will increase in price.

Yet most investment advisors allow - and even advocate - dedicating a small portion, maybe 5% of your entire investment portfolio, to speculations that you think show promise and you believe stand a good chance of increasing in value, for whatever reasons you think that may happen.

Crypto aficionados claim our legal tender is losing purchasing power and credibility in the world, and ultimately will collapse because of poor monetary oversight and control. They believe Bitcoin could step in as a replacement currency. That is far-fetched, however, given Bitcoin has already a market value, so a conversion formula from the US Dollar to Bitcoin is off the table.

But meanwhile, the trading volume and the volatility continues, and some of you who are ‘believers’ may want to invest, and if you do choose to invest in Bitcoin - or any of the other 23,000 coins - realize that you are taking a risk of losing a large portion of your investment, just as you’re hopeful you might make a nice gain.