Cryptocurrency and Economic Uncertainty: Should You Invest in Cryptocurrency in 2021?
Paul Tarins, RICP®,WMCP®,CSRIC™
Bitcoin made its debut in 2009 and has grown exponentially since. For example, in mid-September, Bitcoin was valued at a little over $10,800 per coin. As of mid-March 2021, it has jumped to above $59,000.00 per coin.(1) Cryptocurrency and the blockchain technology has continued to gain popularity over the past decade, and investors are still turning to this alternative market in 2021. In fact, long-established Massachusetts Mutual Life Insurance Co. (MassMutual) purchased $100 million in Bitcoin for its general investment fund, an unprecedented move.2
As we continue experiencing a year of financial uncertainty, let’s take a look at where the world stands when it comes to cryptocurrency and whether you should invest in cryptocurrency.
Bitcoin and COVID-19
Between March 5 and March 12, Bitcoin dropped over $3,600 in price - the biggest plunge this popular cryptocurrency has experienced in over seven years.1 Feeling some deja vu? As most investors remember, the stock market crash of 2020 also occurred around the same time, beginning on March 9.
Similar to the traditional markets, cryptocurrency likely plummeted in response to investor uncertainty surrounding the coronavirus, as well as the decline and disparities over the price of oil in the Middle East, some experts believe.3
It’s important to note, however, that Bitcoin rebounded fairly quickly, reaching its pre-pandemic pricing by the beginning of May.1 Does this indicate that cryptocurrency may be a safer option for investors during times of financial turmoil? There is no certainty in the answer to that question, but many investors are finding it to be an appealing alternative (or addition) to portfolios based in traditional markets.
Blockchain: What Is It?
Essentially, you can think of blockchain as a type of database. As you may be aware, a database stores and collects information electronically. Users can access this database to search and filter for specific information. Of course, as far as databases go, a blockchain also behaves differently than your average database.
One of these differences is how a blockchain collects data in the form of a group. These groups are referred to as blocks. Each block has a predefined storage capacity. Once it reaches that capacity, it is chained onto the previous block. Hence, the name “blockchain.”
You can use a blockchain for recording financial transactions and other items that have value. It is used as a digital ledger of sorts and tracks transactions occurring across a network in real-time.
One of the advantages of blockchain is its decentralization and transparency. The various blockchain records are maintained on a large network of networks, meaning no single person or entity has control over the records' history. Every time new information is accessed and updated, the changes made are verified and recorded before being encrypted and sealed off completely, unable to be edited again.
Blockchain Use During COVID-19
Blockchain technology has been around for more than a decade, but in light of the recent pandemic, some experts believe it could be making its way into more mainstream uses. From testing the virus to tracing vaccine distribution, blockchain technology may be the answer the pharmaceutical industry needs to address safeguarding records and sharing information across multiple channels - as described in a recent article by Coin Journal.4
Beyond the healthcare industry, government agencies and nonprofits may begin turning toward blockchain technology because of its ability to offer data in a transparent and secure manner. Nonprofits, for instance, may be able to use it to give donors peace of mind in knowing their funds are being directed where they should, and not to a middleman or other shady location.
While cryptocurrency has been compared by experts to buying a brick of gold (due in part to its high price per unit), it’s important to still do your due diligence before making any investments. Speak to your financial advisor or investment broker to learn more about this market, and whether or not it could be well-aligned with your greater financial goals.
Which Cryptocurrencies Can You Invest In?
Cryptocurrencies can be lucrative investments. Some of the best cryptocurrencies to invest in right now are:
Bitcoin continues to be the leading cryptocurrency in the market. As of now, its market capitalization rate is 910.4 billion, and its price is $51,071. The circulating supply for this cryptocurrency is 18 million coins.
While not as popular as bitcoin, Ethereum is also a worthwhile investment. Its market cap rate stands at $186.70 billion, and it is trading at approximately $1,620. Currently, there are 114 million Ethereum coins in circulation.
If you are thinking to invest in cryptocurrency, you may have also come across Ripple. This cryptocurrency is comparatively cheaper than Bitcoin and Ethereum. Its market cap rate is around $21 billion, and its price is $0.4756. There are over 45 billion Ripple coins in circulation at the moment.
Bitcoin Cash is expensive than Ripple, but not as much as Ethereum and Bitcoin. The market capitalization rate for this cryptocurrency is $10.13 billion, and its price is approximately $542. The number of coins in circulation is 18.65 million.
The last cryptocurrency on our list is EOS. With a market capitalization rate of $3.8 billion, this cryptocurrency is currently priced at $4.02. The number of EOS coins in circulation is 950 million.
How Is Cryptocurrency Taxed?
If you want to invest in cryptocurrency, it’s also important to understand how it is taxed. According to an IRS ruling in 2014, cryptocurrency is treated differently from other currencies and is considered a capital asset. Examples of capital assets include stocks and bonds.
Because of its treatment as a capital asset, cryptocurrency transactions are subject to tax. Like stocks and other capital assets, selling cryptocurrency generates short-term and long-term capital gains.
To understand this better, let’s suppose that you buy a new TV worth $1,000 using bitcoin. When you purchased this cryptocurrency, its value was $1,000. However, when you purchase the TV, bitcoin is trading at $1,300. In this case, you have purchased a good with the help of a capital asset that is currently worth more in dollars than it was when you acquired it.
As per the transaction that took place, you have generated a profit of $300, and you would have to pay capital gain taxes on the same. If bitcoin was treated as a normal currency, you wouldn’t generate this tax liability.
On the other hand, if you sell your bitcoin at a value lower than your original purchase price, you would generate a capital loss. These are not taxed.
There are so many different opinions on digital currency that I hope this will give you a basic understanding. If digital currency is an asset class that is something you wish to pursue, I would recommend doing your research. How to trade and how to store currency has its own set of obstacles. Due diligence is paramount.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated