Episode 63 Crytocurrency

Today we’re going to talk about Cryptocurrencand I’ll try to cut through some of the hype. If your new to crypto, check out Investopedia’s cryptocurrency page. https://www.investopedia.com/cryptocurrency-4427699 

Cryptocurrencies are systems that allow for secure payments online directly between individuals without  middlemen. Cryptocurrencies use virtual tokens which are created, called mining, on a network of dispersed computers that randomly record blocks of cryptocurrency transactions, called blockchain technology. Bitcoin and Ethereum are two well known cryptocurrencies.

You can make money directly by mining cryptocurrency, but that takes massive computing power. Or by buying a cryptocurrency, and then selling (hopefully) at a profit. The value is based solely on supply and demand and prices have had huge price swings up and down. Blockchain technology is often cited as the real prize. But you can’t buy the blockchain any more than you can buy the internet. 

There more ways to play. BlockFi https://www.blockfitrust.com/ is offering an account that pays interest on cryptocurrency deposited with them, as well as cryptocurrency trusts. There are Cryptocurrency exchange-traded funds (ETFs) and Blockchain ETFs that own stocks in companies that have business operations in blockchain technology.  

But ingenuity and innovation are still far out pacing regulation and disclosure. Finding information on trading costs is tough. After digging through Coinbase’s website I found “it depends”. They disclose trading costs just before you place a trade. On Venmo, I had to go to the literal fine print . “When you buy or sell cryptocurrency, we will disclose an exchange rate and any fees you will be charged for that transaction. The exchange rate includes a spread that Venmo earns on each purchase and sale.” https://venmo.com/about/crypto/   Grayscale which offers a fund only open to accredited investors clearly states it charges a 2.5% management fee. https://grayscale.com/wp-content/uploads/sites/3/2021/08/dlc-fund-fact-sheet-august-2021.pdf  

Price manipulation is another concern. Interestingly, Coinbase addresses this in its crypto slang guide, rather than an easy to find disclosure section. https://www.coinbase.com/learn/tip-and-tutorials/crypto-slang-guide

A pump and dump is a coordinated effort to artificially inflate the price of an asset and cash out before it tumbles back to down. Think Gamestock. The biggest holders of crypto, known as whales, have the potential to move markets with their trades. The top 100 Bitcoin addresses out  800,000 plus held more than 20 percent of all BTC according to bitinfocharts.com. 

Lastly, there’s taxes and recordkeeping. You need to keep detailed crypto records to to file your income tax returns, or again pay someone else to do the record keeping for you. The cryptotrader.tax website has a good blog that covers a lot of the (many) tax rules you need to consider. https://cryptotrader.tax/blog/the-traders-guide-to-cryptocurrency-taxes

 Keep learning and if you want to start playing in crypto, don’t go all in.  I’m not recommending it at all just yet. But if you try it,  don’t invest any more than you are willing to completely lose

Transcript

Announcer: 0:14

Welcome to the Money Pilot Financial Advisor Podcast, where you team up with Money Pilot fouder, former Army helicopter pilot and your host, Katie Cannon, to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and lead your financial life.

Kathleen Cannon: 0:55

Hello, everyone and welcome back to the podcast. Today we're going to talk about cryptocurrency. To be honest, this topic makes me a bit uncomfortable. crypto. currency is all the rage, and it seems like everybody's doing it. He promises great things. Yet, there are real consequences, glossed over costs. And you know, old people just don't get it. Frankly, it reminds me of teenage sex. And I'm about as excited to dive into this minefield as your high school Health Education teacher was to talk about safe sex. But I'm not one to shy away from tough discussions. So let's dive right in. So you may have already guessed, I'm not yet recommending that my clients invest in cryptocurrency for several reasons I'll get to in a bit. But if you're really interested in trying it out, instead of getting all freaked out about it, and taking a no not ever approach. Today, I'll try to cut through some of the hype and have a frank talk on pros cons and trying to stay safe out there. First, if you're new to crypto, check out Investopedia's cryptocurrency page for some solid foundational information on cryptocurrency and blockchain technology. And I'll put that link in the show notes. This is great information for those of you curious to see what the hype is actually all about. I like investopedia because it doesn't deal or profit from cryptocurrency and it's pretty unbiased. On the other side of the scale, I was frankly horrified to see what passed for disclosure information on Venmo which is marketing their crypto services hard and Coinbase where I had to do my own mining to find their expenses buried in the Help menu of all places. So cryptocurrencies are systems that allow for secure payments online directly between individuals, that is without banks or other institutions as middlemen. Instead of a national currency like the US dollar, cryptocurrencies are virtual tokens. These tokens are created called mining on a network of dispersed computers that randomly record blocks of cryptocurrency transactions, called blockchain technology. Cryptocurrencies aren't backed by or created by governments or institutions, it's decentralized. That's the whole point. Bitcoin and Ethereum are two well known cryptocurrencies you've probably heard of. You can make money directly by mining cryptocurrency, but that takes massive computing power far out of reach for most people. The other direct way is by trading, that is buying a cryptocurrency and then selling hopefully at a profit. There's nothing backing these currencies, though, is no gold, no governments, no FDIC insurance, the value is based solely on supply and demand. And since crypto has hit the stage, prices have been very volatile. That is there have been huge price swings up and down. Actually, the blockchain technology that makes cryptocurrencies possible is often cited as the real prize. But buying Bitcoin because of blockchain's amazing capabilities would have been like saying 35 years ago, invest in a particular tech company, because the internet is the next big thing. The internet was and is the big thing, but there were spectacular winners and losers along the way. Sure, there's Amazon. But remember tech giant AOL and "you've got mail"? Yeah, My point exactly. But you can't buy the blockchain any more than you can buy the internet.

Unknown: 5:08

So like the dawn of the internet, it's all about picking winners and losers before they become winners and losers. And that's the that's the tough part, right? It's like the wild west of opportunity out there right now. And I think it's this aspect of cryptocurrency that's so appealing to so many of you. It's sort of air quoting here, unregulated, young, wild, dare I say almost forbidden. Many people are jumping in relatively blind to get in on the action before it's too late.

Kathleen Cannon: 5:44

And there's way more to cryptocurrency momentum than just directly buying and selling coin. For example, BlockFi is offering an account that pays interest on cryptocurrency deposited with them, as well as cryptocurrency trusts. There are cryptocurrency exchange traded funds (ETF) and blockchain ETFs that own stock in companies that have business operations in blockchain technology. There are new opportunities popping up every day. But ingenuity and innovation seem to still be far outpacing regulation and disclosure. I know I know, that's the point. So just like those safe sex talks were a real drag. Let's look at some of the things to watch out for on the cryptocurrency frontier.

Unknown: 6:35

First step trading costs. Honestly, finding this information is tough. from speaking with other advisors, it seemed like trading costs for individuals can run up to 3% of transaction. I wish I could provide a better resource on costs. But it's difficult to find. After digging through Coinbase's website for quite a while I found it's depends, and that they will disclose trading costs just before you place a trade. Venmo is pushing crypto trading hard on its app. And I had to go to the bottom of their homepage to find in the literal fine print, "When you buy or sell cryptocurrency, we will disclose an exchange rate and any fees that you'll be charged for that transaction. The exchange rate includes a spread that Venmo earns on each purchase and sale." And that spread is the difference between what you're gonna pay and what they pay for it. And so that spread is the money in their pocket, their profit for doing the trade for you. But you don't know what that's going to be until literally you're about to hit the key and make your trade. And some investment options are more transparent. Grayscale which offers a fund that's only open to accredited investors. It clearly states it charges a 2.5% management fee, which is higher than many other funds that are out there that don't deal with cryptocurrency, like a stock fund or something. And a similar vein, if you aren't prepared to store your own crypto keys, you'll need a digital wallet, yet another potential cost. And this is important because your personal identity isn't recorded in the blockchain when you buy crypto. If you lose your password for your cryptocurrency, it's gone forever, like cash and a fire. A wallet stores that password for you. And then another concern is price manipulation. Interestingly, coin base addresses this in it's crypto slang guide rather than an easy to find disclosure section. And I've got links to all this in the show notes so you can pop in there to see what I'm talking about. For instance, they define a pump and dump as a coordinated effort to artificially inflate the price of an asset and cash out before it tumbles back down. So think Gamestock. A group of traders will work together to drive up the price of a specific small cap cryptocurrency. As prices rise. The schemers promote the opportunity on social media, attracting more investors and driving the price up even more. Then when the price hits their target the original group cashes out taking big profits and leaving everyone else holding the bag as the price collapses. And speaking of big fish and small ponds, the Coinbase guide went on to reveal that the biggest holders of crypto are known as whales. But unlike the vast majority of crypto traders, whales have the potential to move markets with their trades. And as of May 2021, the top 100 Bitcoin addresses out of more than 800,000 held more than 20% of the Bitcoin according to bitinfocharts.com. Lastly, let's talk taxes and record keeping. While cryptocurrency is designed to eliminate the middleman like banks and control of prices, like national currencies do, crypto is not beyond the grasp of the IRS, and they have been cracking down. At least some of the problem is that people getting into crypto may be new to investing and trading in general, and unaware that many of their transactions are taxable. And again, you need to keep detailed crypto records to be able to file your income tax returns. Or just pay someone else to do the record keeping for you. The rules are similar to buying, selling, or gifting other assets like stocks and bonds. And you can really get hit if you trade frequently and rack up short term capital gains, which are taxable as income as opposed to the lower long term capital gains tax. But this doesn't even scratch the surface. Check out crypto trader dot tax website, I'll put a link to that in the show notes as well. They have a good blog that covers a lot of the many tax rules you'd need to consider. And it's a good place to just start anyway. So there you go. Crypto is clutch. But comes with a lot of downside you might not consider if you don't look before you leap. Still interested? Keep learning. And if you want to start playing in crypto, don't go all in. The advisors I know that are most enthusiastic about crypto, still only recommend committing about 1% of invested assets. And I'm not recommending it at all just yet. But I get it. Even I get swept up and spend a couple bucks on a lotto ticket when it hits hundreds of millions of dollars. And those odds are way worse. So if you want to test the waters, play it safe, and don't invest any more than you're willing to completely lose. And Beware the Whale. Have any more questions about crypto? I'm tempted to say as someone else. But seriously, I love hearing from you guys. Send any questions you have my way, and we'll talk to you again next week. Thank you for joining today's podcast like to find out more, visit us at www.moneypilotadvisor.com Le's team up and land your financi l life.