How Should Cryptocurrency be Classified?
As cryptocurrency markets start heating back up, there’s increased debate about how investors should categorize this value source. Three regulating agencies in the U.S (SEC, IRS, FinCEN) all disagree - - considering it a security, property, or a currency (respectively). Is cryptocurrency even a financial asset or something completely on its own?
For many pre-2017 investors of digital coins and tokens, the HODL (hold on for dear life) strategy has become a permanent part of their portfolio; others have given into FUD (fear, uncertainty, doubt) and sold off early for quick gains, losing out on huge price jumps later. No matter what an investor’s current position is, the high volatility of cryptocurrency makes it difficult to label it as currency, since currencies should be a stable store of value. As a result, getting paid or making a payment in crypto should always be done cautiously as the benefits may widely differ from one day to the next.
Making a comparison for crypto being a security is also difficult. Single stocks are widely spread out when it comes to market cap and trading activity; conversely, Bitcoin remains the dominant player amongst the numerous cryptocurrencies available today in both areas. ICOs (initial coin offerings) have shown similar success to the stock market’s IPOs (initial public offering) when it comes to quick short-term gains; however regulators are starting to crack down on new ICOs making this a gray area for future consideration as a security. The SEC and CFTC have a critical meeting on May 7, 2018 to shed light on this debate, likely paving the way for specific regulation and treatment.
As far as a general financial asset, it’s critical to consider the lack of asset protection that’s involved in cryptocurrency. Large exchanges have been hacked and millions lost due to poor controls without any legal recourse to recoup losses. Individuals keeping large amounts of coin on exchanges are constantly targeted by hackers through malware, ransomware, and phishing emails. Investors must be proactive to add further controls on their own beyond passwords (such as offline wallets and storage) to reduce the high risks of keeping crypto on exchanges.
Overall, investors should consider cryptocurrency in its own category, subject to multiple, ongoing dynamics that make it prone to extreme movements of losses or gains from one day to the next. Regulation, mass adoption, and security controls being the dominant factors in the future outlook and long-term performance - - leaves much to look for in 2018 with cryptocurrency.
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