Cryptocurreny: The Highlights and Lowlights
Matty Kerr is co-creator with John Brancaccio of The Working Experience. He is also a filmmaker and published author. Listen to our podcast on iTunes and Spotify and visit our website: theworkingexperience.com for videos, merchandise and more. You can also find us on Facebook, Linked In, Instagram, and Twitter.
Investing: “Am I right or am I wrong? My god, what have I done? And the days go by.”
There are many types of cryptocurrencies. John used to play the crypto markets but then it just got too crazy. Venezuela was going to switch to a crypto based currency and have their whole economy resting on it but the World Bank would not back their economy if that were to be the case, which would diminish their credibility on the open market.
It’s all the rage but the details often remain murky. What is it exactly?
The real questions for a layman such as me who knows nothing about cryptocurrencies, are very basic, such as, ”Can you purchase a car with Bitcoin?
The answer is yes.
How does that work? How does cryptocurrency translate into real dollars?
With multiple exchanges like Coin Base and Gemini you can easily transfer crypto into US dollars. There are also credit cards (John used to have one) that you can have crypto on, such as Bitcoin, and go to your local Trader Joe’s or wherever and pay for it with cryptocurrency. The conversion to real dollars happens on the back end with whatever third party you are using. Any place that takes a credit card will take it. There are some stores that will take crypto natively, meaning they accept it with no transfer, but most work through a third party to convert to real dollars. The rate of exchange is calculated at whatever the currency is trading for at that moment.
The concept that is difficult for many old-fashioned people like me to grasp is the fact that there is no actual, physical money; cryptocurrency exists solely in the neo-tech ether, on your phone, in your virtual wallet. The “money” moves in the abstract which might work for Wall Street gurus and the like but makes the average citizen with a savings and checking account uneasy.
Which is precisely the problem for economists and governments. Cryptocurrency is not backed by gold or silver and is therefore seen as very volatile. To be fair, there is not a whole propping up the dollar other than the good faith of the US Government, but they have a lot of resources with which to back it. With crypto there is just no “there” there. Nothing is propping it up, aside from people like Elon Musk who, while a visionary, is not always regarded as the most stable person. At one point, Musk announced that Tesla would be accepting Bitcoin as payment for cars. Then he posted a Tweet stating that Tesla would no longer accept Bitcoin and the stock tumbled. That kind of instability does not bode well for investors.
So, what is the attraction?
For one thing, you can make a lot of money investing in it. Bitcoin has increased from under a $1,000 to over 60,000 since its arrival in 2009. Today, August 10th, 2021, one Bitcoin is worth $45,000 US Dollars. Other forms of cryptocurrency, such as Ethereum, have also increased in value. But it is very difficult to tell which one will succeed out of all of the cryptocurrencies. It is kind of like putting all of your money on black 32 at the roulette wheel. There will be many that just completely fail. There is a lot of “froth” in the market. Doge Coin was literally created as a joke, the creator stated that it was a joke, and then it exploded, at one point being valued at $46.7 billion. IT WAS A JOKE. That is what is meant by froth. It creates so much uncertainty that it really puts off an average investor like me.
There are other, less savory reasons, that cryptocurrency is attractive.
Let’s say you have obtained $10 million through less than legal means. Before cryptocurrency, you would have to fill a bunch of suitcases with $100 dollar bills and fly to a place Like Costa Rica or Zurich. Now, all you have to do is convert that $10 million to Bitcoin, memorize your key code, land in Costa Rica, use the code to open your digital wallet and you have full access to your money. No more worrying about Customs or getting your money stolen by corrupt officials. The authorities can’t touch it.
Others may think that cryptocurrency is easier to hide from the IRS. Again, it is not like cash; you don’t have to bury bags of it in the backyard. But cryptocurrency exists on a blockchain, which is a system in which a record of transactions made in cryptocurrency are maintained across a peer-to-peer network. So, there is a digital trail. Also, if you start buying houses and cars worth millions of dollars, the feds are going to want to know where you got the money, whether it is cash or crypto.
And the government wants its share. The IRS treats money made on investing in cryptocurrency as short-term gains. For example, if you buy $10,000 of cryptocurrency on Monday and it jumps in value to $50,000 on Tuesday, then you will owe taxes on the $40,000 profit.
Bottomline, investing always involves risk. You can make a lot of money from cryptocurrency and some people have. But it’s probably not a great idea not max out your credit cards and take out a line of equity on your house and put it all into Bitcoin or Ethereum or another crypto-coin. The cryptocurrency market is largely unregulated; the top ten holders (whales) hold 80% of the supply. They are able to move the cryptocurrency market pretty easily, so it’s not a great place for your average-Joe investor to try out their investing savvy. Bitcoin could go to $100,000 a coin, or just as easily drop to $1,000.
And if Elon Musk sends another one of his Tweets, you may lose all of it.
