Billionaire entrepreneur and Tesla founder Elon Musk went out of his way to mention his favorite cryptocurrency multiple times when hosting Saturday Night Live recently. This publicity stunt perfectly captured the current debate: Are cryptocurrencies worthy of prime-time attention? Or destined to be just another punchline?
Nobody knows for sure, despite social media threads trying to convince you otherwise. Your neighbor might already be a cryptomaniac, but as for its investment merits, there’s far more about digital currencies that remain uncertain.
Here are some of the biggest questions:
Does the world need crypto? Cryptocurrencies provide a digital alternative to traditional government-backed money (fiat currencies) such as the U.S. dollar. The fact that dollars are backed by the U.S. government is what makes them safe and reliable, but it also means each dollar’s relative value is affected by policies of central banks such as the Federal Reserve.
Crypto believers argue there is global demand for a decentralized currency whose value cannot be manipulated by central banks or government actors. Many digital currencies, including Bit-coin, also have a purposely limited supply and may be more resistant to inflation.
What kind of investment is it? The name would imply these are currencies, but most trade with exceptionally high volatility more akin to penny stocks. The majority have limited volume and require specialized accounts to access. It has been suggested the proper way to view cryptocurrencies is as “digital gold.” That is, an asset uncorrelated to stocks and bonds that will hold its value in times of economic distress.
The right way to categorize crypto remains up for discussion, but in three weeks of COVIDinduced economic distress in February and March 2020, it’s worth noting that Bitcoin lost 60% of its value. Gold, over the same period, was flat.
How will they be taxed and regulated? The short answer is crypto-related gains could be subject to less-favorable tax treatment than traditional investments. If a person owns several cryptocurrencies and uses more than one to purchase goods and services, you can see how “everyday transactions” could result in frequent short-term gains (or losses) upon buying and selling.
Central banks and federal governments, meanwhile, could decide to regulate digital currencies in a way that significantly restricts their appeal. Whether it’s to increase tax revenue or maintain authority, such a development could severely hurt crypto’s popularity and price.
Which ones will survive? If you are among the slim minority who can name five of the more than 6,700 publicly traded cryptocurrencies them, that leaves 99.9% you have never heard of. That matters because if there’s one thing we know about cryptocurrencies, it’s that there will be far fewer winners than losers.
Think back to the tech bubble of the late 1990s. Hundreds of startup companies raced to outrageous stock prices based on the premise the internet would change the world. Guess what? The internet did change the world, and most of those companies still either disappeared or lost most of their value anyway.
In other words, being right about a new technology or trend does not guarantee investment success.
Ben Marks is chief investment officer at Marks Group Wealth
Management in Minnetonka. He can be reached at firstname.lastname@example.org. Brett Angel is a senior wealth adviser at the firm.