CRYPTOCURRENCY IS HERE TO STAY

 

 

“I can say with almost certainty that cryptocurrency will come to a bad ending.” Warren Buffet

 

Recently, my commentary discussed the need to improve financial literacy in America. This week, I will provide some basic information on a type of investment that only a few short years ago seemed too risky and volatile for even the most seasoned investor to consider – cryptocurrency, also known as crypto.

This perception is about to change. The election of Donald Trump will bring crypto into the mainstream of our financial system. While many of us may never purchase any crypto product, like artificial intelligence, crypto now deserves our attention. At a minimum, we should understand what it is and how it works.

Bitcoin, which was launched in 2009, was the first cryptocurrency, and it remains by far the largest of the numerous offerings. By mid-2024, there were 10,032 different digital currencies in this asset class with new types of crypto constantly coming to market.

Crypto operates as a digital alternative to traditional money issued by governments. The currency is often called a "coin" because it represents a unit of digital value that can be exchanged like a traditional physical coin, even though it exists solely online.

To maintain a record of who is buying and selling crypto, a technology known as “blockchain” confirms and records all transactions on a publicly available digital ledger. The blockchain replaces the need for financial institutions to hold currency and to track its movement. In theory a blockchain is tamper proof and designed to prevent any type of fraudulent transaction.

To make a crypto transaction, a user simply needs a “wallet” or digital address which holds each individual’s digital currency.  An access “key,” known only to the user, ensures private and secure transactions. A buyer authorizes the movement of a specified amount of crypto from his/her wallet to the seller’s wallet address. For the system to work efficiently businesses known as digital currency exchanges are required. These entities act as clearing houses and online marketplaces for the purchase and sale of crypto.

Advocates of crypto believe it is the future of money.  However, according to a recent survey by Pew Research, only 17 percent of U.S. adults have owned any crypto product.  In addition, a majority of Americans over age 50 view crypto with skepticism and are not confident of its safety or reliability.

Two examples help illustrate why the public has been suspicious of the crypto market. First, in 2022, the large crypto exchange FTX was widely regarded as safe and one of the best organized. When FTX failed because of mismanagement, including embezzlement of billions by its founder, Sam Bankman-Fried, the very foundation of the crypto industry was shaken and came under attack.

Second, among all asset classes, crypto has one of the most volatile trading histories. This is because crypto is not traded on its fundamentals. It is traded on speculation of future price movements. 

The currency has experienced several massive rallies and spectacular crashes since it first became available. This month, the total value of the top 125 crypto coins— stands at $3.6 trillion, some $2 trillion of which is Bitcoin, just over 55 percent. That’s up 124 percent year to date and 1,720 percent over the past five years. But it is important to remember that Bitcoin also fell over 71 percent from September 2021 to November 2022.

The Biden administration began a push to regulate the crypto industry under its Securities and Exchange Commissioner Gary Gensler. This agency sought to categorize the vast majority of crypto as securities. It proposed strict rules for formation and operation of crypto assets. In a recent setback for Gensler, the SEC was forced by courts to review its denial of certain Bitcoin-related investment products, including exchange-traded-funds. Gensler will resign from the SEC before the Trump Inauguration and will be replaced by crypto-friendly Paul Atkins.

Trump made the removal of the SEC boss and the favorable treatment of crypto a promise to the industry while on the campaign trail. Following the proposed nomination of Atkins, the price of bitcoin surged above $100,000 per coin for a new all-time high.

On December 6, the investment site Barron’s observed, “We are about to be governed by the nation’s first unabashedly pro-crypto administration. Instead of being stymied by the federal government, the crypto cosmos will soon be enabled—nay, driven—by Trump and his team.”

One of Trump’s campaign promises that most excites the industry is his plan to create a national strategic reserve of bitcoins. A strategic reserve is a set of external assets that are immediately available and under the control of the monetary authorities. Under the plan, crypto would be incorporated into the mix of assets that the nation has on its balance sheet with the aim of diversifying reserves.

 J.P. Morgan analyst Ken Worthington recently told his clients, “The anticipation of a more crypto-friendly environment under a Trump administration is driving a surge in crypto business initiatives.” To help the industry, it is reported that Trump is considering the elimination of capital-gains taxes on cryptocurrencies issued by U.S.-registered companies. 

Some worried business leaders point out that it is now unlikely that any meaningful regulations will be promulgated to protect the public from disasters like the FTX bankruptcy. While crypto is moving into the financial mainstream, investors need to carefully weigh their options.