Are Cryptocurrencies an Investment?
Do you feel like you’ve missed out on a once in a lifetime opportunity?
Or are you ‘sitting pretty’ with your bitcoin wallet and enjoying the meteoric rise of the digital cash, or dare I say it – assets?
To appease both camps (the vocal evangelists and the digital doomsayers) keep one thing in mind:
“Past results are no guarantee of future success”
Is buying digital cash an investment?
Well, it depends on what you mean by investment!
And it depends who you talk to!
And what exactly is a cryptocurrency or even a crypto asset?
Are cryptocurrencies something you can readily buy, sit on (hold), and then sell?
Yes, you can.
An investment in that sense, then.
Are they easy to exchange?
Yes, you can readily exchange them so an investment in that sense, then.
So, it’s an investment that’s easily transferable (liquid)
What’s the problem?
Reputation, reputation reputation.
But even reputation has improved from the ‘Silk Road’ days of serious crime to broader acceptance by some parts of the established financial services community.
In the UK even HMRC are providing clearer definitions and ensuring they capture any tax payable on ‘capital gains’
HMRCs guidance is interesting and a further move towards mainstream acceptance.
Just don’t think you can say you was simply betting (thus avoiding paying tax).
It won’t wash.
It’s highly unlikely a caseworker at HMRC will accept this. They’ll simply look at your cold and hot wallets and decide.
Umm, You bought it here (depositing physical cash) with X Xchange, then you sold it there at a profit of X with Xchange.
Total gains xxxx, you owe xxxxx.
But can you add cryptocurrencies to your investment portfolio?
Um, now it’s a little more difficult.
At this moment in time cryptocurrencies are still unregulated (well sort of kind of tentatively).
At the last time of checking there are derivatives available so in some shape and form you can enter into contracts that ‘track’ crypto assets.
But in terms of a mainstream portfolio service accepting the risk – not yet, at least I don’t think so.
In saying this, and keeping in mind the very short history of cryptocurrencies there appears to be significant efforts for acceptance as a mainstream asset.
This is driven by the mainstream financial communites fears of ‘missing out’ which in turn pressures regulators.
However, worldwide regulation is fearfully staying in the shadows as they are (no doubt) waiting for a significant collapse of sorts.
Below shows an update (as of March 2021) and whilst the UK’s regulator (the FCA) acknowledge cryptoassets as ‘very high risk, speculative investments’ they simply inform ‘investors’ that little regulatory protection is in place.
What are cryptocurrencies used for?
Both legal and illegal activity.
At the pinnacle of legality – Elon Musk (owner of electric car manufacturer Tesla and marketing professional) announced in March 2021 that Tesla will accept bitcoin as payment for its vehicles.
There have also been announcements from other companies such as Mastercard, AT and T and even BMW. No doubt many more will follow suit.
And on a much lower monetary exchange level Bitcoin (and other cryptocurrencies) continue to be used for buying goods and services ranging from pet products to computer parts to meat and spectacles.
Low level illegal activity of cryptocurrencies include:
Some individuals get addicted to gambling or pornography, or both!
These vulnerable individuals can get caught out by scammers by being deceived into thinking payment can be made for such services with bitcoin – but then fraudsters simply run off with the bitcoin (or other cryptocurrencies) once deposited.
Individuals are unlikely to report matters to the police.
Bigger time illegal activity has included the ‘silk road‘ saga (image below shows use as marketplace) and a number of other ‘heavy’ uses of cryptocurrencies to fund illegal activity.
Too heavy to mention here.
Unfortunately this activity tarnishes many of the positive attributes of cryptocurrencies and there has been a big shift away from association with this.
And it’s imperative for mainstream acceptance to do this.
Cryptocurrencies as an Investment safe haven?
Cryptocurrencies have provided a welcome alternative in many sectors of business in Venezuala (whose economy collapsed after oil did).
Example below:
1USD = 184,245,986,326.63 Venezuelan Bolívares
In a short space of time the currency has depreciated so much it’s pointless holding it.
Digital cash has proved to be a life saver is such a “Mad Max’ scenario.
What are cryptocurrencies backed by?
My word is my bond springs to mind.
“Trust me with ya shekels, bligh!”
Unlike conventional currency (which is backed by a government) cryptocurrencies aren’t.
Whatever your personal view of government (their purpose and use) most people feel more secure when they know that something has ‘government backing’.
Cryptocurrencies flow from one computer to another as bits of cryptographic code.
There is gold-backed cryptocurrency – something called Stablecoin where each token is backed with physical gold. With the token price pegged to the current gold price, there is less price volatility compared to Bitcoin or other altcoins.
Essentially, cryptocurrencies could be backed by Fluff below. But then again Fluff is in a fantasy world and is the grand master of all things fantasy like.
What are cryptocurrency miners?
I struggled with the whole mining thing for quite some time. I imagined some super fast computers burning through pylons of electricity to try and give birth to some molten piece of bitcoin.
It seems I was wrong.
HMRC did a good job in describing it in their Guidance from March 2021:
Proof of Work
“The most well-known consensus system is Proof of Work, which is used by Bitcoin (amongst others).
Here, the right to add a new entry to the distributed ledger is only available to the first person to solve a randomly generated complex cryptographic puzzle.
That person then creates the new entry and it is shared with all holders of the distributed ledger.
The time and energy required to solve the puzzle is the proof of work, the right to add the entry is the primary reward.
The person with that right will be entitled to any exchange fees available for including transactions in that entry and they will be allocated with a quantity of new tokens that are released into circulation.
This process is known as ‘mining’ and serves to maintain the network of a given cryptoasset.”
A Quadrillion? Does that sound like a lot?
In a Forbes ‘How Bitcoin Fits In A Retirement Portfolio’ article a good point is made that if bitcoin continues to increase at the rate it has done then it will be worth many many quadrillion in a decade or so.
Remember Bitcoin appeared with a value of 6 cents in August 2010. Since then it’s appreciated around 80 Million %!
If you think the whole existing monetary system will collapse (soon) you may be onto the right thing.
And that my friends is the ‘long and short’ of it.
Are you of the mind that we live in a chaotic state, lurching further towards a dystopic and macro controlled future?
Or do you belive in the the prevailing world order and being able to retire in a nice secure an stable way?
Do you see the price increasing by thousands of % or crashing into an oversized smartphone memory chip?