Cryptocurrency continues to be a hot topic of conversation as its popularity grows globally. In recent months, cryptocurrency made headlines from Super Bowl ad placements to world powers responding to the invasion of Ukraine by freezing Russia’s crypto assets, virtually cutting them off from a significant portion of the international economy. This has left many contemplating the importance of cryptocurrency as a component of the modern portfolio. Many advisors suggest that this is a great time for businesses to buy into the crypto market. Crypto is easy to transfer, offers wider access to individuals compared to traditional credit, and features considerable security provided by the blockchain database used to store users’ information. It’s crucial to understand the pros and cons of owning cryptocurrency, as well as the reporting responsibilities if you do.
First, let’s start by defining what crypto is. Cryptocurrency is actually represented by a token which is issued on a blockchain. Currently, there are thousands of tokens across several blockchains. Simply stated, a blockchain is a distributed Ledger, but we will not go into the details of the technology today. Cryptocurrencies are traded on exchanges and can be expressed in US currency.
Whether you are a business or individual looking to invest, there are several things to keep in mind about cryptocurrency. To begin with, crypto in the U.S. is generally outside the jurisdiction of the federal government, meaning that nobody owns it, therefore everyone owns it. In comparison, China oversees crypto assets via a single digital platform and controls when and how users spend their assets. With the freedom to buy from a plethora of crypto exchanges whenever and however you want, the U.S. market offers unmatched potential for buyers. Another benefit is that it’s easier to transfer crypto assets compared to other financial assets, as processing is immediate and less expensive.
Granted, this freedom comes with a price. While you might have the ability to invest in an array of cryptocurrency varieties and can trade, buy and spend when you wish, the result is a volatile, speculative market. The U.S. Securities and Exchange Commission (SEC), several additional governmental agencies as well as legislators are looking at developing a regulatory strategy. Until the regulatory strategy is in place it is caveat emptor (buyer beware) as the marketplace is akin to the wild west.
Several high-profile investors have entered the crypto space. Kevin O’Leary of shark tank fame announced that he has 20% of assets invested in crypto. Other progressive pioneers have done so as well, like Michael Saylor of MicroStrategy who invested corporate finds in Bitcoin. Word on the street is that institutional money is on the sidelines waiting for a clear regulatory direction and the funds will then migrate into the space.
Another component to consider when investing in cryptocurrency is taxes. Like many assets, gains on cryptocurrency is a taxable event which means tracking each transaction is crucial. Fortunately, these transactions can be recorded simply on a 1040 form in schedule D. Make sure to file every single gain and loss, as every trade is tracked on the blockchain, and IRS has full visibility into every transaction. While this can seem overwhelming, there are software options that can track and manage transactions for buyers, which will make the filing process easier and provide peace of mind.
Like any financial decision, be safe and be cautious when investing in crypto. Most financial advisors are warning of an upcoming correction, which would mean a rapid price decrease in crypto to interrupt an uptrend in prices. The first step is finding a financial advisor who can help you sift through your options and see which cryptocurrency is right for you and your business. Crypto is a huge identifier of how the financial world is changing. As we are still in the beginning stages, the future is unknown, but one thing is for certain: cryptocurrency is not going anywhere anytime soon. If you are determined to invest, look at initiatives with strong business cases. These are the entities that demonstrate the most promise for buyers and long-term success.
