The crypto currency trade has gone from rags to riches.
But before you rush off to mortgage the home to buy into the crypto craze, there are a few facts you need to understand. Or you could get burned.
Crypto Fact No. 1 – Digital Currency is Volatile
Crypto volatility has been obscene.
Investing in the cryptocurrency market has a high amount of risk – you can win big one day, and then, without warning, lose your money the next. We’ve seen the Bitcoin rally from $1,000 to nearly $20,000 in months before dropping to $11,140 in early 2018. And as attractive as the returns have been, downside risk is still present.
No one can tell you what the price of this currency will be tomorrow, in a month, or even if it’ll be here in a year. And at the moment, it’s clearly in bubble territory. And as we know from history, markets are littered with popped bubbles from the tulips in the 1600s to the Internet boom and the U.S. housing market fiasco.
For an idea of how volatile trading has been:
- In June 2017, Ethereum crashed from $319 to 10 cents in only a second on multi-million dollar sell orders being filled at $317.81 to $224.48. As the price fell out of the sky, 800 stop loss orders and margin funding liquidations sent the currency as low as 10 cents. Some folks lost as much as $9,000.
- In June 2017, Bitcoin prices fell more than $200. Any one that conducted any transactions would have seen a 7% to 10% decline in deal value wiped out.
- In September 2017, Bitcoin plunged from a record high of $4,921 on the first of the month to $2,957 by the 15th on concerns of increased scrutiny from Chinese officials.
Crypto Fact No. 2 – There is no fundamental backing
Unlike the U.S. Dollar or gold, digital currencies aren’t backed by anything. They also have no direct fundamental ties to anything, which makes valuing a crypto currency nearly impossible. However, that’s what also makes them so attractive.
There is no bank or government involvement. There are no transaction fees and no real reason to give your actual name. Better yet, merchants around the world are just beginning to accept them, including web hosting to pizza and manicures.
It’s just about revolutionized transactions.
Crypto Fact No. 3 – There’s More Value in Blockchain
You’ll also hear about miners, which generate the “coins” in a ledger (also known as a block chain, which applies to most but not all crypto currencies).
As the BBC explains it:
It’s a “a method of recording data – a digital ledger of transactions, agreements, contracts – anything that needs to be independently recorded and verified as having happened. The big difference is that this ledger isn’t stored in one place, it’s distributed across several, hundreds or even thousands of computers around the world. And everyone in the network can have access to an up-to-date version of the ledger, so it’s very transparent.”
Banks believe it could be the future of financial transactions, for example. In fact, according to BBC, “If banks started sharing data using a tailor-made version of blockchain it could remove the need for middlemen, a lot of manual processing, and speed up transactions…”
Crypto Fact No. 4 – Acceptance is Spreading Like Wildfire
The number of businesses accepting cryptocurrency is growing by leaps and bounds.
Intuit, PayPal, Dish Network, and Overstock.com are some of the biggest. At Microsoft for example, you can buy content in the Windows and Xbox stories. The company was even behind the launch of Azure Block Chain as a platform that allowed larger-scale businesses to use block chain to facilitate settlements.
Even some attorneys are accepting it as payment. According to PYMNTS.com:
According to a report in Law.com some of the big law firms that have been representing bitcoin and other cryptocurrency companies since 2013 have been accepting bitcoin payments – but in recent months, small and big law firms alike, as well as solo attorneys, have also started accepting bitcoin payments in order to meet both the needs of their practices and their clients.
Even Fidelity Investments rolled out a program in August 2017 that allows investors to track their cryptocurrency holdings right alongside traditional assets.
Clearly, it’s popular.
We’re even just beginning to see Bitcoin ATMs popping up. In fact, according to Coin ATM Radar, there are now 2.140 Bitcoin ATMs just in the U.S.
Crypto Fact No. 5 – Cryptocurrencies can be bought with retirement funds
According to Forbes.com:
“The Internal Revenue Code does not describe what a retirement account can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibit “disqualified persons” from engaging in certain types of transactions, such as collectibles, life insurance, and self-dealing and conflict of interest type transactions. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the retirement account holder, any ancestors or lineal descendants of the 401(k) plan participant, and entities in which the 401(k) plan participant holds a controlling equity or management interest.”
Also, it’s essential to know that cryptocurrencies are treated as property for federal tax purposes. In fact, Forbes also reports:
“According to IRS Notice 2014-21, for federal tax purposes, cryptocurrency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. The character of the gain or loss associated with the cryptocurrency investment generally depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of cryptocurrency that is a capital asset in the hands of the taxpayer. For example, stocks, real estate, and other investment property are typically capital assets. Whereas, a taxpayer generally realizes ordinary gain or loss on the sale or exchange of cryptocurrency that is not a capital asset in the hands of the taxpayer, such as business income from mining or other business activities.”
Again, before you rush off to mortgage the home to buy into the crypto craze, know the facts about trading or it could cost you.