Considering Cryptocurrency
By Susan Doktor - a journalist and business strategist
Cryptocurrency has entered a new phase of its brief, turbulent life. No longer the domain of niche investors and finance nerds, it’s making deep inroads in our economy and our personal finances. Cryptocurrency is now lodged in our vernacular. Its name has been abbreviated as crypto—a sure sign of how familiar people are with the basic concept.
But I do mean basic. Cryptocurrency is largely misunderstood, even by people who own some. That’s one reason it’s a little dangerous. A little knowledge can be very misleading. But it’s the next big thing—or at least, the current thing—and investors are jumping into the confusion enthusiastically.
Divided We Stand
Financial experts veer widely in their opinions on crypto. Some see a crypto apocalypse looming just over the horizon that will see millions lose their shirts. Others see it as just another investment, though, admittedly, one that comes with a little more risk. But the volatility of the crypto market is undeniable. And we don’t necessarily understand the forces that drive it, say, with the same degree of certainty we bring to stock and commodities trading. But try we must if we’re to be successful in the crypto market.
The Not-So-Immutable Law of Supply and Demand
Just like anything else that’s for sale, the price of crypto is subject to the law of supply and demand. The more people who want it, the higher the price of some currencies will go. That would, on the surface, portend good news for crypto as more, even casual investors are getting into the game. But it’s not that simple, as the recent crypto crash demonstrates. Despite the general public’s new love affair with crypto, Bitcoin and Coinbase lost half their value in a one-two punch this May. Neither currency has recovered completely. And a new generation of former millionaires has been born.
So it’s reasonable to posit that the crypto market is influenced by many of the same forces as other investment vehicles. Continued record inflation? The instability of the commodities market? Geopolitical factors like the war in Ukraine? Maybe the baby formula shortage, for all we know. Whatever normally makes traditional investors nervous could well have a chilling effect on the cryptocurrency market, too.
Creating Demand for Crypto
Have you noticed how crypto advertising is flooding the media? It’s not the buzz alone, though, that’s fueling the crypto craze. In some ways, cryptocurrencies are beginning to resemble fiat currencies and other investment classes.
There are more of them now: a shocking 12,000-plus of them. And new currencies are being launched all the time. The number of cryptocurrencies doubled between 2020 and 2021.
You can buy them through more “retailers.” There are now over 600 crypto exchanges, some of which trade hundreds of cryptocurrencies every day. To put that in context, compare the number of crypto exchanges to Trader Joe’s reach—the chain has about 530 stores. And crypto exchanges operate entirely online. That means every investor with internet access can potentially patronize them.
Crypto Looks More Familiar Now
Another factor driving the growth of the crypto market is that they’re beginning to resemble more fathomable assets, like cash. Nowadays you can buy a Gucci handbag with crypto. In Venezuela, you can also buy a Big Mac. Starbucks, which serves about 400 million coffee drinks a day, accepts crypto for payment now. Buying dog food on Amazon.com? No problem. Just pull out your crypto wallet.
Crypto has begun to penetrate the real estate market. You can now secure a crypto mortgage, using crypto to collateralize your loan The advantage of doing so is that you retain ownership of your crypto and whatever value it gains. One company, Milo, dominates the crypto mortgage market right now, but the field is growing more crowded, with several fintech companies and online lenders jumping into the red-hot real estate market with their versions of a crypto mortgage.
Planning for Retirement with Crypto
According to the Tax Policy Center, some 60 million Americans have Individual Retirement Accounts (IRAs). That represents about a third of the US population. Cash, stocks, mutual funds, and bonds still make up the lion’s share of assets held in retirement accounts, but workers can now stake some of their retirement funds on cryptocurrency through a crypto IRA.
Crypto IRAs offer the same tax advantages as traditional IRAs. Given crypto’s volatility, it’s considered a very aggressive investment and not recommended for workers who are nearing retirement age. But if you’re young and have time to recover from a potential crypto crash, opening a crypto IRA may be a smart move. It all depends on how much risk you can tolerate.
There’s now another route you can take to crypto retirement investing: your employer-sponsored 401K plan. Fidelity, the largest 401K management company in the US, is now permitting employers to offer a crypto investment option. Arguably, the company is looking out for employees by putting a cap on how much they can invest in crypto. Under the company’s rules, an individual’s 401K portfolio can consist of no more than 20% crypto. However, many financial advisors recommend you limit your crypto investments to no more than 8% of your net worth. And some recommend less.
What Does the Future Hold for Crypto?
There’s no doubt that private and institutional interest in crypto is growing. Back in February, Crunchbase reported that venture capital investments in crypto-related companies soared to more than $21 billion in 2021—almost tripling the amount pledged the year before. The beneficiaries included startup cryptocurrencies, crypto exchanges, crypto security firms, and others in the crypto space. The year 2022 is off to a strong start. Several crypto companies are considering going public, offering investors one more way to invest. Crypto derivatives are another emerging opportunity for investors interested in gambling on where the price of crypto will go.
But the crypto horizon is murky. Politicians across the spectrum have been discussing how the federal government might regulate the crypto market and threaten one of crypto’s main attractions: its decentralized nature. Bipartisan talks about including crypto regulations in upcoming infrastructure bills are common on the Hill. Regulation may have a cooling effect on the crypto market, even as it aims to protect investors.
As for the trajectory of the cryptocurrency market, it’s anybody’s guess. Anyone who says he or she can predict where the market is going is pretty much talking trash. The market’s history is one of extreme volatility and that’s unlikely to change. Investing in crypto is not for the faint of heart.
So what’s a crypto investor to do? In short, proceed carefully. Diversify your portfolio, not only across asset classes, but also among cryptocurrencies. And be prepared with significant cash reserves before you invest in crypto. The road is likely to get bumpy ahead.
Author Bio:
Susan Doktor is a journalist and business strategist who covers a wide range of personal finance topics in her work. Her contribution comes to us courtesy of Money.com.
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