Is Cryptocurrency a Good Idea?

Cryptocurrency has generated significant attention over the past decade. As a digital or virtual currency, it offers a unique alternative to traditional financial systems. While its value has surged and fallen dramatically, cryptocurrency continues to draw interest for its potential as an investment. However, despite its growth, 75% of Americans still express concerns about its safety and reliability. In this post, we’ll explore the pros and cons of cryptocurrency, along with its tax implications, to help you decide if it’s a viable investment for your financial portfolio.

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December 26, 2024

Overview of Cryptocurrency

Bitcoin, the first and most well-known cryptocurrency, was created in 2008 in response to the global financial crisis. It aimed to offer an alternative to traditional banking systems. Since then, other cryptos have emerged, and the crypto market has grown significantly. In fact, a Harvard study noted that new investors increased dramatically in 2017 and 2020, with 10,000 and 5,000 new investors entering the market each month, respectively.

Cryptocurrency as an Alternative Asset

Although a large portion of Americans remain skeptical about crypto, the rise in crypto investment in recent years suggests it is becoming increasingly viewed as an alternative asset. This shift in investor interest could potentially change perceptions about its reliability and safety.

What Are the Pros of Cryptocurrency?

Inflation Protection

One key benefit of the digital currency is its ability to act as protection against inflation. Unlike traditional currencies, which can lose value due to inflation, cryptocurrencies like Bitcoin maintain value because they are not controlled by any central authority or monetary policy.

Possible future High Returns from Crypto Investment

The crypto market is forecasted to grow 12.5% annually between 2023 and 2030. Thus, there is potential for high returns as crypto continues to evolve and mature as an asset class.

Quick Transactions with Cryptocurrency

Another advantage is the speed of crypto transactions. Crypto transfers are typically settled within minutes, whereas traditional financial transactions can take days, especially for wire transfers.

Portfolio Diversification

The digital currency can offer diversification in a portfolio, especially because its market trends do not always align with the stock or bond markets. This lack of correlation could increase overall portfolio returns, especially for investors with a balanced mix of traditional assets.

What Are the Cons of Cryptocurrency?

High Risk

Crypto is highly volatile, making it a risky investment. Its volatility is much higher than that of stocks or bonds, meaning the potential for large gains is accompanied by the potential for significant losses. Thus, limiting crypto investments in your portfolio might be wise to manage risk.

Lack of Federal Regulation

Currently, the digital currency is not regulated by any specific federal consumer protection law. While various consumer protection laws may apply, the lack of consistent regulations adds to its uncertainty. However, future regulations could alter the landscape.

Potential for More Losses Than Profits

Crypto transactions may have more losses than profits, making crypto a less secure investment. According to a survey of more than 1,400 consumers, 38% had losses with their crypto sales. Only 28% said they made a profit.

Vulnerable to hacking

Crypto exchanges are more vulnerable to cyberattacks than traditional financial institutions. Hackers have stolen significant amounts of cryptocurrency, though insurance may cover some of these losses.

Limited Use as a Payment Method

While cryptocurrency is gaining traction, it is still not widely accepted as a form of payment. Many businesses hesitate to adopt it due to its volatility, which makes pricing products and services in crypto challenging.

What Are the Tax Implications of Cryptocurrency?

The IRS treats cryptocurrency as property, meaning any sale of crypto that results in a profit is subject to capital gains tax. The rate depends on how long you hold the digital currency. If held for less than a year, the standard income tax rates apply, while long-term holdings (over a year) are subject to capital gains rates of 0%, 15%, or 20%.

Since cryptocurrency is not considered a security by the IRS, the wash sale rule does not apply. This means if you sell crypto at a loss and repurchase it within 30 days, you can still claim the loss on your taxes, unlike stocks.

Is Cryptocurrency a Good Investment?

Ultimately, whether cryptocurrency is a good investment depends on your financial goals and risk tolerance. While crypto offers potential high returns, it is also highly speculative and volatile. A balanced portfolio, including both traditional and cryptocurrency investments, may help manage these risks. Always consult a tax professional for guidance specific to your situation.

References

Faverio, Michelle, and Olivia Sidoti. “Majority of Americans Aren’t Confident in the Safety and Reliability of Cryptocurrency.” Pew Research Center, https://www.pewresearch.org/short-reads/2023/04/10/majority-of-americans-arent-confident-in-the-safety-and-reliability-of-cryptocurrency/

Cryptocurrency Prices, Market Cap and Charts. https://www.forbes.com/digital-assets/crypto-prices/

“‘Not a Bunch of Weirdos’: Why Mainstream Investors Buy Crypto.” HBS Working Knowledge, http://hbswk.hbs.edu/item/not-a-bunch-of-weirdos-why-mainstream-investors-buy-crypto

Cryptocurrency Market Size, Share & Growth Report, 2030. https://www.grandviewresearch.com/industry-analysis/cryptocurrency-market-report

Williams, Geoff. “Should I Buy Cryptocurrency? Analysis And Portfolio Approach.” MoneyGeek.Com, 2 Mar. 2022, https://www.moneygeek.com/investing/crypto/cryptocurrency-or-stocks/

Expertise: Personal finance, real estate, et al. “38% of Investors Have Lost More in Crypto Than Made It.” LendingTree, https://www.lendingtree.com/debt-consolidation/crypto-investors-survey/

Digital Assets | Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/digital-assets