If there ever was an enduring personal financial meme, it would be cryptocurrency. We’re hearing questions from the parents about whether it’s advisable to convert some cash into cryptocurrency now that their children have profited through flipping Ethereum. Now even the IRS is getting in on the deal through its question on your tax return about whether you have held crypto.
You’ve probably heard of the most common crypto options, including Bitcoin and Ethereum. Before you should consider moving funds into crypto, you should understand what it is. Simply put, cryptocurrency is a method of storing value digitally that can be easily transferred to others, even across international borders. Unlike traditional currencies, crypto is generally not available in a physical form and is not issued by a centralized banking authority. Crypto is supported through blockchain technology, which involves using a distributed network and cryptography to track and facilitate crypto storage and transfer.
Former CU Boulder star Spencer Dinwiddie was at the vanguard of the crypto movement with his proposal to “tokenize” his contract with the Brooklyn Nets. In essence, Dinwiddie worked with a provider to make a piece of his $34 million contract with Nets available through a $150,000 crypto token. Dinwiddie would then get some of the proceeds of selling the tokens upfront while purchasers would receive proceeds from his contract. While it didn’t pan out as planned, partially due to limiting the offering to well-heeled accredited investors, it did give us an early indication of the coming conflation of celebrity and crypto.
It turns out Dinwiddie’s proposal to offer something of value (his contract) in return for a crypto token may have been quaint. Now celebrities such as Kim Kardashian and other influencers are promoting newly created crypto without offering anything in return. If you’re motivated to purchase crypto with an Instagram post, think about whether that influencer will be there if your newly minted crypto ends up crashing.
Some regulators have not hesitated in pointing out crypto’s flaws. “Cryptocurrency is 95 percent fraud, hype, noise, and confusion,” said Minneapolis Federal Reserve Chair Neel Kashkari earlier this year. Crypto believers may doubt the judgment of a Fed banker as someone who is tied to a hopelessly old school world of government-issued currency available in a physical form. But he raises a good point that potential speculators would be wise to pay attention to who stands to profit from crypto purchases. Who is on the other side of the transaction?
Smaller issues of crypto are particularly susceptible to classic “pump and dump” schemes that has blighted some individual stocks over the years. The first step is to acquire thinly traded crypto. Then use a celebrity to promote the issue. Once the price goes up, take the opportunity to sell said crypto anonymously.
Investors are naturally enthusiastic about the future of blockchain technology for use in financial services. Be careful that the optimism and excitement for the technology isn’t transferred into any crypto that comes your way. Don’t get me wrong, even putting money into well-known crypto such as Bitcoin and Ethereum is speculation. They don’t generate income like real estate or a company. They don’t have a track record of being a relatively stable form of value such as a classic currency such as the dollar or Euro.
The crypto investment thesis is that you hope others will pay more for it than you did. You may reason that “it is going up,” when what you truly mean is that it has increased in value. We don’t know what will happen in the future. So the next time you’re using Venmo to pay for a meal or your babysitter, think twice about swiping left to buy some crypto. While different crypto currencies may increase in value over time, I’d only convert into crypto your cash that you can afford to lose.
David Gardner is a certified financial planner professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change.