What is the Deal with Cryptocurrencies?

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By Aaron Simpson
January 28, 2022

Cryptocurrencies have been a hot button topic over the past 12-18 months. We are often asked casually if we believe in crypto as a viable portfolio addition or not. Opinions online and through the media vary widely, but clarifying some crypto facts will hopefully answer some of the questions “floating” around online (just like the coins themselves!).

Believe it or not, there are thousands of cryptocurrencies around the world, but the vast majority don’t have a very big following. Bitcoin is the most well-known and “secure” cryptocurrency, and the coin that often dominates media conversation (thanks Elon Musk).

Conceptually, cryptocurrencies were designed to be free from government manipulation and control. This has changed in recent years. As of June 2021, over $1 trillion are invested in these coins. After reaching an all-time high above $68,000 per Bitcoin in November 2021, they have lost roughly 50% of their value, which translates to an extremely volatile market.

With the amount of cash moving into cryptocurrencies, governments are wanting to make sure they are getting their “cut” of profits. Countries around the world, including the United States, are sending warning letters out to taxpayers reminding them that they must report crypto gains on their tax returns. Currently, gains on Bitcoin are subject to capital gains rates.

When an investor holds a stock, they hold a per share claim on future company profits. A bond promises an investor a future cash flow stream, including the repayment of principal. What is difficult about Bitcoin (or any cryptocurrency), is the appreciation or value isn’t tied to anything trackable. This makes the conversation about having Bitcoin in a retirement portfolio too unpredictable. Perhaps in the future, cryptocurrency will become more mainstream when banks ultimately create their own digital currency, but until there is a reliable way to predict how and when appreciation will occur, clients should not rush to include them in portfolios.

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