December 2021 Foodman Website and JD Supra
crypto investing

Danger signs abound

Despite its volatile and speculative nature, a single bitcoin is trading at around $61,134 (11/5/21.) Demand is growing exponentially, despite multiple danger signs. For example:

  • The SEC, the U.S. Treasury, the DOJ, OFAC and the Financial Action Task Force (FATF) are all getting ready to tighten and restrict the cryptocurrency industry
  • There was a steep sell-off in May 2021, and could easily be another
  • China’s announcement in September 2021 that it would ban all Crypto transactions except its own
  • The possibility that crypto has hit an all-time high. If so, financial experts would state that this is the worst time to buy
  • Crypto’s use is complex and poorly understood
  • Virtual currency is perceived (particularly by major media) to facilitate illicit transactions and money laundering
  • Price manipulation in the crypto market, otherwise prohibited in the securities market.

Is the demand driven by higher adoption?

Some experts believe that demand will grow as long as Institutional availability grows. A new report by Chainanalysis notes that adoption of digital assets has grown 2300 percent since 2019 and 880 percent in the past year.

When the dust settles, a big question will remain. Can crypto turn into a housing bubble like the subprime mortgage lending crisis of the mid 2000s?  The quick answer is that this is possible. And that’s because it is nearly impossible to measure crypto leveraging.

What’s propelling the growth?

Propelling the frenzied growth is

  • Peer-to-peer (P2P) platforms in emerging economies
  • Robust public and private online social networks
  • Adoption of digital currency by major brands
  • Investors hoping for wealth
  • Creative “exciting” new lines of products

As more investors adopt Bitcoin, the price will continue to grow. Bitcoin has worldwide recognition and investors who study and learn the intricacies of the crypto space end up investing in it.

Seeing some of the mind-boggling returns, even some of the biggest corporations and institutions have joined the crypto craze. For example, Mastercard’s embrace of crypto and its new partnership with Bakkt certainly helps bring the currency into the mainstream. Mastercard is allowing banks to issue crypto credit/debit cards and expanding its cryptocurrency offerings for merchants, and financial technology companies in the U.S.

Will leverage be the downfall of Crypto as it was for the subprime housing loans?

At the present time, it is virtually impossible to measure transparency in the crypto industry. Just because transactions are recorded on the blockchain does not make them transparent. As a result, it becomes extremely difficult to measure how much leverage is in the crypto industry.

There are crypto investors who purchase and sell crypto with the assistance of leveraged trading. That is usually capital borrowed from brokers. A margin call could wipe out these investors.

Unregulated exchanges which can’t be monitored or measured are usually where products such as swaps are traded. Major crypto investors and funds maintain that this lack of regulation and transparency is the allure of crypto.

Before you buy:

  • Read, study and learn
  • Only invest in what you understand
  • Consider a Buy/Hold Strategy for tax implications
  • Invest no more than you can afford to lose
  • Consult a Crypto Tax Specialist ©