Should you invest in crypto? – Forbes consultant

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Cryptocurrency has taken the world by storm. Since 2009, when the first cryptocurrency—bitcoin—was launched, the cryptosphere has experienced tremendous ups and downs.

It is true that cryptocurrency is an extremely volatile asset. Investors need to understand that owning cryptocurrencies involves taking a lot of risk in their portfolios. But for investors who understand how to manage risk, cryptocurrencies could present huge opportunities.

Is it safe to invest in crypto?

Crypto has brought huge profits to some investors, while others have lost significant amounts.

William Procasky, CFA, assistant professor of finance at Texas A&M University-Kingsville, says new investors should stay away from crypto. But he also notes that more experienced investors, who understand how to deal with risk, could find a place for it in their portfolios.

“If you’re building a broad portfolio and want to add cryptocurrencies to the 5% or 10% of your portfolio that you’re allocating to alternative assets, then you might be fine,” Procasky says.

Bitcoin and Ethereum are the two largest cryptocurrencies by market capitalization and are more established than many other crypto options. This makes them a safer bet for most investors.

“If you go for options like Bitcoin and Ethereum, which are more established, there’s a little more security around them,” says Lauren Niestradt, CFP/CFA, senior portfolio manager at Truepoint Wealth Counsel.

What the SEC Says About Cryptocurrency

The SEC has been skeptical of cryptocurrency. In an interview with Yahoo Finance, Securities and Exchange Commission (SEC) Chairman Gary Gensler said that crypto companies must “come into line” with existing laws.

These remarks came after the FTX debacle in late 2022.

Gensler hopes that, among other things, the SEC could offer protections to consumers if crypto holding companies decide to become lenders.

“There is no reason to treat the crypto market differently just because it uses a different technology. We should be technology neutral, Gensler said in a speech in April 2022.

This means not only new laws and regulations—which Congress is debating—but also existing regulations that could affect the operations of crypto exchanges and other companies.

Risks of investing in crypto

There are several risks associated with investing in cryptocurrencies: loss of capital, government regulations, fraud and hacking.

  • Loss of capital. Mark Hastings, a partner at Quillon Law, warns that investors must tread carefully in the unique financial landscape of cryptocurrency or risk significant losses. That’s a risk with any investment, but the increased volatility of cryptocurrency makes it an even bigger risk factor. With Bitcoin down more than 60% over the past 12 months, these losses could easily add up to a significant portion of the original investment.
  • State regulations. According to Michael Collins, CFA, professor of financial planning at Endicott College, many governments have yet to fully regulate the use and trading of cryptocurrencies, which can make it difficult to know what to expect in terms of legal and financial risks. Some are even calling for cryptocurrencies to be illegal in the United States. This is probably an unlikely scenario, but since it has already happened in China, it is certainly a possibility.
  • Fraud. As in any unregulated industry, scams abound in the cryptosphere. Says Hastings: “Cryptocurrency scams skyrocketed in 2022, and the lack of regulatory oversight of the industry left thousands of investors out of pocket.”
  • Hacks. Hacks are quite common with cryptocurrencies. According to Chainalysis, more than $3.2 billion worth of cryptocurrency was stolen in 2021. Although many exchanges offer private insurance, if you lose your cryptocurrency in a hack, you may not be entitled to your investment back.

Cryptocurrency adoption

The price of Bitcoin is around $17,000 as of this writing. That’s well below its all-time high of more than $65,000 in November 2021.

However, rather than a long-term investment, Bitcoin was initially hailed as a form of electronic cash. For this to work as promised, cryptocurrencies like Bitcoin would have to be able to be used to buy goods and services.

But with more than 22,000 cryptocurrencies in circulation, very few are widely accepted for buying goods or services.

At the end of 2020, it was estimated that approximately 2,300 US companies accepted cryptocurrencies for payments. In 2019, there were more than 35 million businesses in the United States, which means that those accepting cryptocurrencies are the last straw.

Could crypto become the new global currency?

With all the excitement surrounding cryptocurrency, many supporters have touted the possibility of it becoming a global currency.

“I don’t think governments will allow such a competitive currency to that extent,” says Procasky. “A global currency has to be very liquid and very deep, and there is nothing that can compete with the US dollar.”

Money is a strictly regulated and controlled asset. As evidenced by the 2022 scandals — such as Terra Luna, Celsius, and FTX — crypto can cause significant damage to individuals’ finances in its current incarnation. Most of the world’s governments would not allow their financial systems to carry that kind of risk.

“I think it’s still years away,” says Niestradt, “and that’s where some of the speculation lies. That is not certain.”

Is crypto a hedge against inflation?

Those who still believe that Bitcoin and other cryptocurrencies could be a hedge against inflation are simply not paying attention.

According to the US Bureau of Labor Statistics, in November 2022, core inflation rose more than 7% year over year. Bitcoin has fallen more than 65% in the same period.

“Crypto fails the test as a hedge against inflation. If he can be given an F-, that’s how he performed,” says Procasky.

Cryptocurrencies and taxes

Investors must pay capital gains tax on any income they earn from cryptocurrency. This means that almost every time a cryptocurrency changes hands, it becomes a taxable event, including mining or staking.

Capital gains taxes are around 15%, but can be as high as 20% or more.

In order to make a purchase with cryptocurrency, investors usually have to convert it to fiat currency. Because of this, using cryptocurrency for most purchases is taxable, making it more expensive than buying goods with cash.

Is crypto a good long-term investment?

Widespread adoption would be necessary for a cryptocurrency to gain long-term value, and cryptocurrencies face enormous hurdles.

Andrew Rosen, CFP, president of Diversified LLC, says, “While I think the underlying blockchain technology is innovative and practical, until it is decoupled from unregulated currency gambling, it is too risky.”

However, more speculative investors may want to take a risk.

These investors may or may not see a short-term payoff, but that doesn’t mean the right cryptocurrency can’t bring them huge profits in the long-term. Of course, the total value of an investor’s cryptocurrency holdings could simply drop to zero.

Should you invest in crypto?

The final decision on whether you should invest in cryptocurrencies can only be made by one person: you.

However, whatever decision you make in this regard, it’s worth studying carefully, understanding the investment thesis of each individual coin, and even talking to a financial advisor.

“There are other assets that you can speculate on. It doesn’t have to be crypto, but if you believe in the long term that it has a role and you believe in blockchain technology, then there’s a case for it,” Procasky says. .

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