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|Cryptocurrency is strongly not recommended for use in an investment portfolio. Only invest in bitcoin if you can afford a total loss. Please ask in the forum for guidance.|
Cryptocurrency is a digital payment system with no intermediaries or banks...
Cryptocurrency has been described as a decentralized, peer-to-peer virtual currency that is used like money – it can be exchanged for traditional currencies such as the U.S. dollar, or used to purchase goods or services, usually online. Unlike traditional currencies, cryptocurrency operates without central authority or banks and is not backed by any government.
There are many forms of cryptocurrency.
Many websites provide tutorial overviews. Here are a few suggestions:
Consider these risks when evaluating investments involving cryptocurrency (Bitcoin):
- Not insured. While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins held in a digital wallet or Bitcoin exchange currently do not have similar protections. Some exchanges do take out extra insurance to protect against a large-scale hack, but will usually not cover account-level breaches.
- History of volatility. The exchange rate of Bitcoin historically has been very volatile and the exchange rate of Bitcoin could drastically decline. For example, the exchange rate of Bitcoin has dropped more than 50% in a single day. Bitcoin-related investments may be affected by such volatility.
- Government regulation. Bitcoins are not legal tender. Federal, state or foreign governments may restrict the use and exchange of Bitcoin. No law requires companies or individuals to accept bitcoins as a form of payment. Instead, Bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless.
- Security concerns. Bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Bitcoins also may be stolen by hackers. Platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can – and have – lost money.
- New and developing. As a recent invention, Bitcoin does not have an established track record of credibility and trust. Bitcoin and other virtual currencies are evolving.
- Bitcoin payments are irreversible. Once you complete a transaction, it cannot be reversed. Purchases can be refunded, but that depends solely on the willingness of the establishment to do so.
- Anonymity. In part because of the anonymity Bitcoin offers, it has been used in illegal activity, including drug dealing, money laundering and other forms of illegal commerce. Abuses could impact consumers and speculators; for instance, law enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off the ability to use or trade bitcoins.
Role in a portfolio
Investments in cryptocurrency investments should be considered similar to the gambling portion of your portfolio. In other words, only invest in Bitcoins if you can afford to lose all of the investment.[note 1]
Virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
- John Bogle recommends setting aside no more than 5% of your investments as "funny money", which is the most you can afford to lose and not jeopardize your retirement.
Source: Bogle, John (2001). John Bogle on Investing, the First 50 Years. McGraw-Hill. p. 24. ISBN 0-07-136438-2.
Life is short. If you want to enjoy the fun, enjoy! But not with all of your hard-earned resources. Specifically, not with one penny more than 5% of your investment assets. At most! Have the fun of gambling, but not with your rent money - and certainly not with your retirement assets nor with your funds for your college education.
- Investor Alert: Bitcoin And Other Virtual Currency-Related Investments, from the SEC, May 7, 2014, Viewed September 10, 2017.
- How is Coinbase Insured?. from Coinbase, Aug 11, 2017, Viewed September 11, 2017.
- Bitcoin: More than a Bit Risky. from FINRA (Financial Industry Regulatory Authority), May 7, 2014, Viewed September 9, 2017.
- Bogleheads® forum post: , by forum member Swelfie.
- "IRS Virtual Currency Guidance". 06-Aug-2017. https://www.irs.gov/newsroom/irs-virtual-currency-guidance. Retrieved 09-Sep-17., from the IRS.
- Investor Bulletin: Initial Coin Offerings, from the SEC, July 25, 2017, Viewed September 9, 2017.
- Chen, Shi and Chen, Cathy Yi-Hsuan and Härdle, Wolfgang K. and Lee, TM and Ong, Bobby, A First Econometric Analysis of the CRIX Family (August 30, 2016). Available at SSRN: https://ssrn.com/abstract=2832099 or http://dx.doi.org/10.2139/ssrn.2832099
- Hileman, Garrick and Rauchs, Michel, 2017 Global Cryptocurrency Benchmarking Study (April 6, 2017). Available at SSRN: https://ssrn.com/abstract=2965436 or http://dx.doi.org/10.2139/ssrn.2965436
- Bogleheads® forum topic: