Is Cryptocurrency an Investment or the Coming of New Currency?

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Maurice StouseBy Maurice Stouse, Financial Advisor and Branch Manager

When an asset of any kind starts appreciating quickly, it gets a lot of people’s attention. Such has been the case with cryptocurrency. Many refer to it as Bitcoin. Bitcoin, of course, is just one of several crypto currencies available, but it has nonetheless become the vernacular when someone is referring to it. There are other crypto currencies such as Ethereum, dogecoin and they continue to grow. We think investors and savers alike should take caution with regards to crypto currency as a store of value (an asset class) or as a transaction medium.

The total market value of just Bitcoin in the world is believed to be at or close to $1 trillion dollars. As a basis of comparison, the market value of all the gold in the world is believed to be at or close to about $3 trillion dollars. What is it that is driving some investors to it? Is it demand, supply, the new currency, an inflation hedge? There is some validity to all of these.

First, let us look at Bitcoin as a (potential) addition to or replacement of the dollar. It is gaining more acceptance in trade and even Tesla has decided to accept Bitcoin as payment for a vehicle. One Bitcoin is worth about $56,000 and that could help someone purchase a new electric vehicle from the automaker. There are a few important details that we have learned.

Janet Yellen, the U.S. Treasury Secretary, as reported by CNBC in February sees it as “an extremely inefficient way to conduct monetary transactions.” (Her comments also to the “legitimacy and stability” of cryptocurrencies.)

Currently, several major U.S. investment firms are moving forward with programs making the investment in crypto currency available to clients who meet certain net worth minimums they set out.

How are cryptocurrency transactions taxed? Investors should consult with a tax advisor and they can also see the IRS guidance on Crypto taxation. Forbes also (in 2019) published information on how crypto currency is taxed. Forbes also, in its February/March issue has a feature on Crypto Currency.

Another consideration is the amount of power it consumes. Research from the International Energy Agency (IEA) among others is replete with data that point this out.

Digiconomist.net estimates on its website that one Bitcoin transaction leaves the carbon footprint of more than 1 million Visa transactions, or 78,000 hours of watching YouTube. It also estimates that the same transaction uses the equivalent of 34 days of electricity for the average U.S. household. Given this, it is hard to see that crypto currency is an efficient method of payment.

Some investors (more likely professional investors) see Bitcoin as a replacement of or in addition to precious metals (like gold) as a hedge against inflation. This past year central banks the world over released trillions of additional monies into the worldwide financial system. The more something is available as the saying goes, the less it is worth. In other words, that could mean price inflation (brought on by monetary policy).

What are other central banks in the world currently doing? CNBC reported recently that China is proceeding with a digital currency and with that, could that have implications for the strength of the U.S. dollar?

Inflation can erode purchasing power as well as eat into the return on an asset. While savings rates are near 0%, once inflation is factored in, is the saver or investor losing purchasing power?

Inflation fears continue to grow with so much stimulus having been released and with economic growth starting to emerge from the pandemic. If cryptocurrency is in limited supply, that in and of itself can also help drive the price. Cryptocurrency (wherever is comes from) must be mined online, with computing power. It is not easily created. That adds to the attraction and the speculation.

Reports are now emerging that many recipients of stimulus payments (as many as 40% as recently cited in a report from Mizuho Securities) intend to put at least a portion of their stimulus checks in to crypto or Bitcoin. Speculation is a driver of an asset’s appreciation, because it creates momentum. Does this suggest that the appreciated asset has risen in value? The price of any asset is always determined by what someone is willing to pay for it.
The world of cryptocurrency, like any investment is subject to regulation little of which currently exists. It is difficult to determine at this point what that regulation might be and just how much of it is coming.

Investors are encouraged to work with their financial services firms to get the research and the insight they need to make informed decisions if they are considering venturing in the world of cryptocurrency. Knowing what you own, why you own, how you own and where you on it are all critical elements of that discovery process.

Cryptocurrency issuers are not registered with the SEC, and the cryptocurrency marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management and Raymond James and he resides in Grayton Beach. He has been in financial services for over 33 years. His main office is located at First Florida Bank, a division of the First, A National Banking Association, 2000 98 Palms Blvd, Destin, FL 32541, with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City, Pensacola, Tallahassee and Moultrie, Ga.—Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management First Florida Bank, and The First, A National Banking Association are not registered broker/dealers and are independent of Raymond James Financial Services. Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Investors should consult their investment professional prior to making an investment decision.