The popularity of Bitcoin and other cryptocurrencies continues to grow, but there are some key things you need to know before investing.
As investors, you should keep in mind the numerous risks associated with cryptocurrencies in addition to learning the basics. These include the volatility of even the most popular cryptocurrencies, the lack of transparency in the market, irreversible transactions, minimal or nonexistent consumer protections, and the lack of clarity among regulators regarding how they will regulate them. Investing in cryptocurrencies should be treated as a speculative asset using funds outside of a long-term investment plan.
Take a closer look at some of the issues they raise:
What are the SEC’s views on cryptocurrencies?
Despite the fact that the Securities and Exchange Commission has generally been skeptical of cryptocurrencies, chairs have expressed concern that they are too volatile, that investor protections are inadequate, and that regulations are inadequate, current SEC Chair Gary Gensler has stated on a number of occasions he does not intend to outlaw them. Over the last several years, the agency has rejected multiple applications for exchange-traded funds (ETFs) that invest directly in Bitcoin.
SEC Chair Gary Gensler said in August 2021 that he was open to ETFs that invested in cryptocurrency futures, but not those that invested in spot markets, since the Commodity Futures Trading Crypto Commission already regulates futures markets. Two Bitcoin futures ETFs were approved and launched in October 2021–the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF). Several others have followed, but they are all limited to Bitcoin and Ethereum, as those are the only two cryptocurrencies with active futures markets.
Do you think Bitcoin or other cryptocurrencies will become the new global currency?
As long as there is an appropriate level of regulation and consumer protection, we don’t think so, but time will tell. To be viable, a currency usually has three characteristics:
- As an inexpensive, reliable medium of exchange, it can be used;
- As a unit of account, it can be used;
- A currency can serve as a store of value and a means of payment as well as a store of value.
The use of Bitcoin as a medium of exchange, a unit of account, or a store of value will likely be limited as long as it has high volatility and high transaction fees. As cryptocurrencies have become more widespread, the risk of regulation has increased, eliminating some of their appeal to those investors who see them as an alternative to central bank policy and national governments. This is another barrier to their broader acceptance as a true currency.
Can Bitcoin be used as a hedge against inflation?
Because the value of Bitcoin is not tied to the value of a basket of goods or services, its value as an inflation hedge is uncertain and subject to speculation. Despite rising inflation data, Bitcoin experienced sharp rallies and sharp price declines throughout much of 2021 and 2022. The long-term effectiveness of Bitcoin as an inflation hedge remains to be seen.
How are cryptocurrencies taxed?
Currently, Bitcoin is treated like property, not as a currency by the IRS. The IRS taxes cryptocurrency transactions whenever a taxable event occurs, such as selling Bitcoin for a fiat currency, purchasing a product or service with Bitcoin, or trading it for another asset. Currently, investors are responsible for tracking cost basis, gains, and other reporting. For help, please refer to IRS Notice 2014-21, or contact a tax advisor.
Since November 2021, Crypto Trading Platforms have been required to report cryptocurrency transactions on form 1099-B, which was passed as part of the Infrastructure Investment and Jobs Act of 2021 (IIJA). Starting in 2023, the IIJA will also require the IRS to report cryptocurrency exchanges worth $10,000 or more to the IRS, similar to the current form 8300 reporting requirements for cash transactions. While this $10,000 reporting requirement may not apply to cryptocurrency transactions less than $10,000, it does mean those transactions are not taxable. The tax code states that “all income from whatever source derived” is taxable, even if it’s not reportable to the IRS. Even if a person sold $500 worth of items at a flea market and did not file a Form 1099 with the IRS, he or she would still owe taxes on that income.
