Cryptocurrency Investing in 2022

B”H

Friday, January 14, 2022

Cryptocurrency Investing in 2022

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

Charles Dickens penned these words nearly 163 years ago in his “A Tale of Two Cities” to describe his thoughts regarding the French Revolution. His words, one could argue, could describe the current climate surrounding investment in Bitcoin.

On one side you have investors like the legendary Warren Buffett who calls Bitcoin and other cryptocurrencies “rat poison”, arguing that they are unproductive assets whose value isn’t tied to any products that are made or services offered. According to this view, it is virtually impossible to determine their appropriate value and therefore determine the wisdom of investing in these asset classes.

On the other side of the argument are people like Charlene Fadirepo, CEO of GuideFi and former bank regulator. Because of its decentralized nature and potential for exponential price appreciation, Fadirepo argues that cryptocurrencies, especially Bitcoin (BTC), are a tool for social justice because they can create generational wealth. Fadirepo contrasts this aspect with what she describes as the discriminatory and exclusive nature of the traditional banking systems which have especially failed minority families and communities.

Because there is such a vast and diverse range of opinions regarding investing in Bitcoin and other cryptocurrencies, it is often quite confusing for investors, especially new ones, to determine the appropriate course of action regarding how to invest in cryptocurrencies.

Let’s demystify this decision making process for you by starting with the definition of a cryptocurrency. Investopedia defines cryptocurrency as “...a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double spend.”

They continue, “Many cryptocurrencies are decentralized networks based on blockchain technology–a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.”

While this is perhaps a bit wordy, there are at least two very important takeaways from this definition. The first is that cryptocurrencies aren’t typically issued by any governments or other central authority. Therefore, a central authority can’t devalue your potential cryptocurrency investment by simply producing more of a particular cryptocurrency, as is the case with most paper currencies, such as the euro or the U.S. dollar. It is this ability to simply print more money, often in order to pay for debt, that is a big reason why government issued securities are widely considered a terrible vehicle for the asset growth necessary to build wealth.

The second important takeaway is that, despite the increased prevalence of reported scams, investing in cryptocurrencies is typically quite safe for investors. This is perhaps ironically highlighted by the now infamous August 2021 $600 million (USD) hack of the Poly Network.

This, in part, is because cryptocurrencies, including Bitcoin, typically operate with a distributed ledger system. This type of ledger system means that every transaction can be seen and must be verified by numerous parties. So, even if some person or group had the requisite technical skills and necessary hardware to be able to hack an account or network, they still wouldn’t be able to cash out and spend that cryptocurrency since it would never be verified as a legitimate transaction. This is precisely what happened in the Poly Network hack, and the hacker(s) were forced to subsequently return the purloined cryptocurrencies within a couple of weeks.

Also, as Fadirepo notes, the potential upward volatility of cryptocurrencies in general and Bitcoin (BTC) specifically is another incredibly enticing benefit for potential investors. Consider the story of Terrence J. Leonard. In 2019, Leonard began with an initial investment of $2,000 (USD) in Bitcoin (BTC). Nearly two years later, Leonard became a millionaire when the price of the cryptocurrency skyrocketed yet again.

Since Bitcoin (BTC) was first introduced in 2009, its price history has been marked by extreme volatility. The initial cost of a bitcoin was merely a fraction of a penny. Fast forward to 2022, where, so far, it has closed everyday above $41,000 (USD) per bitcoin.

However, there are numerous potential obstacles for you to consider when deciding how, or whether or not to invest in cryptocurrencies, such as Bitcoin (BTC). We believe that three potential obstacles to consider are:

1. Downward price volatility.

2. Environmental concerns.

3. Uncertain regulatory future.

Downward price volatility. There were two significant price declines for Bitcoin (BTC) in 2021, including one that began just over two months ago. On November 10, 2021 Bitcoin (BTC) reached an all-time high of $68,789.63 (USD) per bitcoin. Its current price represents a nearly 40% drop in value since that recent high.

Environmental Concerns. According to Digiconomist, a single Bitcoin transaction uses the same amount of electricity that an American family uses in nearly three months. The mining of cryptocurrencies also generates an incredible amount of electronic waste, since the hardware for mining quickly becomes obsolete. Digiconomist reports that this obsolescence results in nearly 30 thousand tons of electronic waste every year, on the Bitcoin network alone.

Regulatory Actions. In August 2021, the U.S. Senate passed H.R. 3684. This infrastructure bill contained a provision that imposed reporting requirements for cryptocurrency brokers. The underlying rationale was that additional tax revenue would be collected by the U.S. Government as a result of these reporting requirements.

Senator Elizabeth Warren (D-MA) and others have sounded the alarm regarding the aforementioned environmental impact associated with Bitcoin. We believe that these environmental concerns along with concerns of illicit activities virtually guarantee that significant regulatory action will be proposed in the near future.

Still, regulatory action should not inherently be viewed as some rubicon not to be crossed. In fact, appropriate regulation of cryptocurrencies can be a market stabilizing force by providing clarity, building trust and providing security in this highly important sector.

However, the combination of the current partisan climate of U.S. politics, the slate of elections between now and the end of 2026 (3 congressional, 1 presidential, 5 gubernatorial), and current prognostications regarding who will be those electoral winners point to the greater likelihood that regulation will resemble the fluid, yet disjointed nature of the U.S.’ Covid-19 regulations.

Despite the potential fear, uncertainty, and doubt (FUD) surrounding Bitcoin and the rest of the cryptocurrencies, there are a number of positives that may make it a wise investment. While there is no single factor to determine the wisdom of investing in cryptocurrencies, Financial Industry Regulatory Authority (FINRA) Rule 2111 is a great place to start.

Also known as the suitability rule, this rule “requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.”

FINRA continues, “The rule states that the customer’s investment profile “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs [and] risk tolerance,” among other information.”

Therefore, we believe that the best way to determine how or even if you should invest in cryptocurrencies such as Bitcoin is to first develop and understand your investment profile. This is typically best done with a skilled financial advisor. Your advisor will help you develop an investment portfolio that considers things such as your investment history, investment goals, and your appetite for risk.

As part of due diligence, your advisor will also help you evaluate unregulated private offerings in the cryptocurrency space. Private cryptocurrency or crypto-related offerings offer tremendous growth potential, but many offerings are fraudulent, according to regulators at North American Securities Administrators Association (NASAA).

Despite some of the uncertainty regarding cryptocurrencies, they still figure to be a part of a portfolio for many people, especially if you are looking to capitalize on the upshot of decentralized finance and build generational wealth like Terrence J. Leonard and many others have done.

Happy and successful investing!

To partner with us to help you build your perfect investment portfolio, or to reach out with comments, questions, or concerns, please email us at info@taryagfinancial.com. (Above image courtesy of Art Rachen)