This year, we have seen the downside of bitcoin & other altcoins.
Bitcoin. Ethereum. Litecoin. Ripple. Ether. As 2017 ended, the prices of these cybercurrencies were soaring. In early 2018, they have plummeted. Opportunistic investors have been left to wonder: Are these digital currencies really the next big thing, or the scariest investment around?
The answer to that question may vary per day, week, month, or year. These altcoins are classified as commodities, not currencies, by the Commodity Futures Trading Commission. Like all commodities, their value can quickly change.1
Since last spring, bitcoin has been on a wild ride. On May 1, 2017, a single bitcoin was worth $1,402.18. On December 1, the value had soared to $10,859.56. Fifteen days later, it hit a peak of $19,343.04.2
Then came the fall. By February 1, a single bitcoin was worth just $9,052.58. On February 5, the price sank to $6,914.26. A week into February, the value of bitcoin was still well under $9,000.2
Ethereum has been just as unstable, if not more so. An ether was worth $8 when 2017 started. By June, its value was hovering near $400. In mid-July, the price slipped below $200. As 2018 began, an ether was valued at $767.37. Two weeks later, it peaked at $1,415.42; on February 5, it slipped to $665.95, recovering to the $800 level a couple of trading days later.3,4
If bitcoin and ethereum were stocks, price fluctuations like this would leave their shareholders alternately exhilarated, horrified, and exhausted. Yet many equities investors are looking at cybercurrencies with great interest, seeing money to be made.
As the above examples show, money invested in these commodities can also easily be lost. Extreme volatility aside, ethical and moral issues are also complicating the acceptance of altcoins.
Cryptocurrency may be revolutionary, but it is also shadowy. In the opinion of the Securities and Exchange Commission, bitcoin and other little-regulated altcoins are ripe for criminal activity, particularly fraud and currency manipulation. The Treasury Department’s Financial Crimes Enforcement Network agrees.1
Cryptocurrencies have been linked to money laundering, a common practice of drug cartels. They are also convenient for online gambling operations. Does an investor really want to risk supporting these activities? Some analysts argue that these doings have been fundamental to the rise of bitcoin and ethereum.5
You may be curious to know how the Internal Revenue Service sees cybercurrency. It defines bitcoin as a form of property, and it may end up broadly applying that definition to other altcoins.1
As more and more businesses are taking digital currency payments, altcoins will remain economically viable. Analysts at Morgan Stanley, however, see the cryptocurrency rally slowing soon unless governments start to provide federal oversight for bitcoin and its ilk.3
If you are nearing retirement and thinking of directing a bit of your invested assets into bitcoin or other cybercurrencies, take a step back and consider the risk exposure of these investments. Putting any portion of your retirement savings in such a hugely speculative commodity is perilous. If it scared you when the S&P 500 lost more than half its value in the bear market of 2007-09, imagine investing in a cybercurrency and seeing 25-80% of the value of your investment erode in weeks. It has happened, and it could easily happen again.6
Altcoins are spicing up the investment world these days, but you may be better off with a plain vanilla portfolio or depending on your risk tolerance, guaranteed alternatives like indexed annuities may be a better option.
If you have any questions, James Spicuzza may be reached at 727.939.9465 or by e-mail. Learn more about James Spicuzza.
1 - miamiherald.com/news/nation-world/national/article154076124.html [6/5/17]
2 - coindesk.com/price/ [2/7/18]
3 - marketwatch.com/story/ethereum-has-lost-175-billion-in-market-value-in-4-weeks-2017-07-11 [7/11/17]
4 - coindesk.com/ethereum-price/ [2/7/18]
5 - marketwatch.com/story/stay-away-from-bitcoin-its-complete-garbage-2017-06-15/ [6/15/17]
6 - fool.com/investing/2018/02/06/its-officially-a-stock-market-correction-heres-wha.aspx [2/6/18]