Cryptocurrencies are a very odd asset class. The theory of creating a system for a financial market that everyone, worldwide, can use without government manipulation makes sense. A crypto coin held by a person in America has the same “value” as a person holding an identical crypto coin in, for instance, Bangladesh. This has its advantages and disadvantages, which we’ll probably discuss in the future, but for now, let’s look at what type of asset class cryptocurrency belongs to.

Your first response is probably “It’s a currency you fool! The name says it all!”. Well, okay. It is designed to be a currency for sure. But, really, what is it? How is it actually being used? Today, and in the near future?

First of all, only 2 cryptocurrencies are really retaining any significance. Bitcoin is the leader in this space and holds a strong but volatile monetary value. The other is Ethereum, whose native Ether token has lasting value but Ethereum, the company, is expanding into blockchain digital services in general, namely “smart contracting”. There are reported to be 23,000 cryptocurrencies on the market today, and if they are anything other than a Bitcoin or an Ether, they are discussed as an “Altcoin”.

“Stable Coins” have emerged, which are designed to retain a constant value ratio that doesn’t fluctuate much with market conditions, similar to money market instruments. There is even a U.S. Dollar crypto stable coin (USDC) pegged 1:1 with the U.S. Dollar and managed through Ethereum. Some of these stable coins have failed, though, so they are not without risk.

Much consternation surrounds the existence of cryptocurrencies with a lot of attention from governments. They are trying to iron out how they can protect the public from swindlers and market manipulation, how to curb the use of crypto to fund illegal activity, and how the asset is categorized when traded. Wall Street hasn’t come to a consensus either – some call the asset malarkey, pointless, or a fraud, while others see huge opportunities. 

Traditional banks are even warming up to the idea of providing crypto services and are lending their support. Most online brokerage firms already offer cryptocurrency trading. Cryptocurrencies are going through growing pains, for sure. It does seem apparent, however, that they are standing the test of time and are here to stay.

Back to the question of how cryptocurrency is actually being used today and in the foreseeable future. I can remember the days when Bitcoin was brand new and retailers, like your local coffee shop, would draw a small Bitcoin symbol on a plain piece of white paper and write “Bitcoin accepted here”. You could get a slice of pizza with it at some places. Those hand-drawn signs taped to merchant windows and cash registers have disappeared… but… you can still use bitcoin, and ether, for many online merchandisers and services. Prompted by an informative article by Finbold (https://finbold.com/guide/how-to-use-bitcoin/), I asked Microsoft Copilot to list bitcoin store “aggregators”. It provided a link back to the very Finbold.com article I was reading and produced the one segment of the article I wanted to include here:

Here are some popular Bitcoin store aggregators that you can check out:

1. Spendabit: A search engine that allows you to find products from merchants who accept Bitcoin ¹.
2. Coinmap: A map that shows the location of merchants who accept Bitcoin ¹.
3. CoinGate Merchant Directory: A directory of merchants who accept Bitcoin ¹.
4. Bitcoin.com map: A map that shows the location of merchants who accept Bitcoin ¹.
5. OpenBazaar: An online marketplace that allows you to buy and sell goods and services using Bitcoin ¹.
6. useBitcoins: A directory of merchants who accept Bitcoin ¹.

I hope this helps!

[Microsoft Copilot]

Even though it is possible to use bitcoin for payments, it is still in a clunky phase. Most of us aren’t using it this way. After all, one Bitcoin is around $44,000 at the time of this post. Ether is around $2,200. How likely is one to, say, buy a new lawnmower from Home Depot using their Bitcoin or Ether? Buying a house, or a car, or major home upgrade may be more feasible but this is still in the early phases to get this to catch on.

Most buyers and sellers of Bitcoin use this for investment purposes instead right now. Most call the investment a “speculation” trade. How and why Bitcoin is exchanged is important for regulatory and taxation purposes. Consider the following:

If cryptocurrency is cash, any increase (or decrease) in value is treated like ordinary income (or loss) when sold or exchanged. If it is used in a personal capacity, increases are taxed at the current applicable rate for the individual taxpayer (presently max 37%) and losses are not deductible. Business use losses may be deductible.

If cryptocurrency is a thing, it is considered a barter and has the same implications as cash.

If cryptocurrency is a security, like a stock, it gets special tax treatments and this is currently how cryptocurrency is treated. This also means it is subject to oversight and regulation from the Security and Exchange Commission (the SEC). This is fluid at the moment as to how the SEC will be impact this industry. For now, cryptocurrencies held for longer than a year are taxed like long-term capital gains on stocks, with the preferential tax treatments of 0%, 15%, or max of 20% tax rates on capital gains depending on one’s income. This also means that cryptocurrency losses realized when sold or exchanged are deductible.

Just on the horizon is the likelihood that at least some Bitcoin spot price ETF’s, proposed by several financial firms, will be approved by the SEC. As of now, the only Bitcoin-related ETF’s are for futures contracts. A spot price ETF reflects on the actual current price of the cryptocurrency and the futures ETF reflects the expectation of price at some future date.  This will increase the trading activity in Bitcoin and draw more attention from institutional investors. But both the spot price ETF’s and futures ETF’s allow investors to invest in the cryptocurrency without having to purchase it outright.

Another description which could apply is cryptocurrency is a collectible, which includes the idea of “speculation” trading as well. I know, I know, stock market investors and traders reading this are probably grumbling at me right now. They want to keep “speculation” in the “security” camp, which is fine. But, think about it. Does trading Bitcoin resemble trading fine art or baseball cards in the hope it will increase in value at all? Just a thought. Collectibles held more than a year and sold for a gain are taxed at a flat 28%.

To add hair to this big ball of complexity is to remember cryptocurrency is a global currency. It is not beholden to American laws and oversight anywhere else. Each country can make up its own rules on how it deals with cryptocurrencies. Ironically, the whole bottom line in cryptocurrency creation was to circumvent government and banking rules, wasn’t it?  

The subject of cryptocurrency is overwhelming when one begins to scratch the surface. Very technical indeed. We’ll get into some interesting areas related to crypto from time to time and try to make it simple. Please stay tuned.