So, you happily purchased Bitcoin in October of 2021 for $54,000 each and were ecstatic when it hit $67,582 on November 8. Since then, your investment has gone from bad to worse and by the end of the day on May 20, 2022 your Bitcoin is worth $29,244, if in fact you have not already sold at a loss. Is this the time to get out and wash your hands of the whole cryptocurrency thing? Or is it time to remember the words of Baron Rothschild that the time to buy is when there is blood in the streets even if it is your own? At the root of this dilemma is this. What is the future of cryptocurrency?
Which Assets Come Back from a Crash?
Back in the depths of the Great Depression and Dust Bowl years farmers all across the heartland of America walked away from their farms, bankrupt and destitute. Individuals who had cash at that time commonly bought land simply by paying the back taxes. Why did they do that? Droughts to not last forever, people need to eat, and in the 1930s war was brewing in Europe which virtually guaranteed high prices for farm products for anyone who could hold on for a few years. Most of these investors sold their farmland for hefty profits as the farm economy thrived during World War II.
Which Assets Don’t Survive a Crash?
The rise of the internet and companies that used it resulted in a massive speculative bubble. It was a “new era” for the stock market when prices were no longer based on company fundamentals until the dot com crash when companies like Cisco lost 80% of their value and companies like Global Crossing, NorthPoint Communications, Worldcom, Boo.com, and Pets.com all went out of business. Amazon.com lost significant value but survived to become today’s tech darling. Cisco and Amazon had income coming in and therefore had fundamental value while the vast majority of those that went out of business were trading on their “dot com” names and were mostly speculative ventures.
Where Does Cryptocurrency Fit in This Investment Picture?
The price swings of Bitcoin and other cryptocurrencies are speculative and accelerated by FOMO, fear of missing out. The problem for investors is that Bitcoin and others typically overshoot and then fall in price as panic sets in. There are certainly profits to be made from timing the market but the long term prices of cryptocurrencies are a different matter. Will cryptocurrency in the end be like productive farmland or like stocks whose only speculative value lies in their “dot com” name?
Practical Uses of Cryptocurrencies
The crash of Bitcoin as inflation surges shows us that it is not a store of value or hedge against inflation when fiat currencies fall. As the stock market falls investors are finally looking at fundamentals to predict at what level the crash will bottom out. The same will apply to Bitcoin and others. The fundamental value of cryptocurrencies lies in their original purpose as a medium of exchange and in practical uses like the purchase of NFTs and in decentralized finance. At this time, it is hard to predict where Bitcoin and others will level out based on these practical uses but it will be a non-zero value. And the cryptocurrencies that are the most useful will likely be the ones with greater value.
Crypto Taxes and Regulation
The fantasy that one could make a fortune in crypto and that no one would notice when you cashed out has been shown to be false. Crypto taxes work like those on stocks and other investments. Short term capital gains are taxes at the rate of ordinary income while long term gains are taxed at a lower rate. Regulation is on its way along with the likelihood of a US digital currency as the President has issued an executive order meant to get all Federal agencies on the same page. Our take is that taxation, regulation, a US digital currency and the current market crash will end up dampening the speculative value of cryptocurrencies which will eventually find values based on their real world practical uses.
What Is the Future of Cryptocurrency? – SlideShare Version