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What does cryptocurrency mean for you and me?

Photo by  Austin Distel  on  Unsplash

What does cryptocurrency mean for you and me?

The Scene -
It's December 2017, and I’m sitting at a fundraiser event, where my wife and I are profoundly out of place. At our table, we have millionaires, bankers, and classically trained artists from around the world. We’re not any of those things. We are a few nobodies in our twenties, the same age the catering staff pouring our drinks.

You get the picture and the topic of discussion that night. Cryptocurrency, freaking cryptocurrency.

I had been researching the topic six months prior, and I had some many questions. I was curious about what they knew, so I dove headfirst into the conversation because I wanted answers.

What exactly is a cryptocurrency? How’s that different than blockchain? What’s it use case for the people of America? How did this invention of blockchain get into the minds of these people? Why were they interested?

Before we get there, let’s back up six months prior to the event. I’m at work, speaking with an engineer and we got on the topic of investing then there was the bait. You need to check out ethereum. A relatively new coin or ICO (initial coin offering), he said big banks were just starting to “invest” is this technology and the underlying platform.

Since I’m not one to take someone’s word and make a bet. I do my best to make informed buying decisions with a long term investment strategy. I try to avoid speculative trading at all cost.

Here’s a photo of my initial notes.

Here’s a photo of my initial notes.

 

Breaking cryptocurrency down.

To break it down, I start with what I know about currency and tried to piece everything together from there. If there’s long term value and this is a serious movement, I can get in late and still make money.

Today, we use dollars and cents has an equally understood value. We earn it, spend it, save it and give it. But at its core, we trade it. We sell our time and exchange that with other people. Can I buy something with it? Will other people accept it as fair value?

My investment strategy is pretty narrow, I only purchase equities on the stock market. But I know about another market called ForEx trading or foreign exchange trading. This is where you buy currency from another country in the hopes that it will appreciate faster than your other money. Not my thing but some people do it. It’s more for institutional investors (think BIG BANKS).

Okay, we’ve got something, cryptocurrency is like ForEx trading. I purchase it with US Dollars and my crypto of choice goes up at least that’s the goal in theory. So we have an existing system in place for such trading.

Next, as an investor, the biggest enemy of investments are inflation and taxes. So how would cryptocurrency be taxed?

I asked the engineer, his answer. I don’t know, so back to research. Having spent time preparing tax returns for people, I know a little bit about tax law, so I knew where to look.

The IRS at the time viewed cryptocurrency as a store of value. Just like ForEx, you’re parking cash as another currency to convert it back at a gain hopefully. Only the gains are taxed, not the initial investment amount.

At that time in 2017, there was no law in place that said outrightly cryptocurrency, but they had provisions for treating it as a store of value. Just like ForEx trading. Since new rules have come out which reinforce this position and further strengthen the writing around it.

  • It’s a currency.

  • It’s used and taxed as a store of value.

Question answered. Moving on to inflation.

Now inflation is arguably an investor's worst nightmare because it erodes the value of the asset over time. Who has traditionally controlled currency? If you said governments you’d be correct. They are also the ones who help to control inflation.

Since the Cryptocurrency and the underlying technology blockchain is based on the notion of decentralization. Built to not be centrally controlled isn’t new, history shows us that the bartering system was a decentralized system, there was a negotiation of goods and services. Question answered

  • It’s a currency.

  • It’s used and taxed as a store of value.

  • It’s built on the concept of a decentralized system.

You probably have some more questions.

What it is and how is cryptocurrency useful?
Who controls it?
If I want to trade it, how do I do it?
How can two people exchange it?
How does it work?

It’s built by people, it’s got logic, reason, and it’s programmed which means it’s mostly binary. (Yes and no are binary.)

It’s controlled by the engineers and the code sets the number of coins. The code. THE CODE. So someone somewhere picked a high random number, and that gets set as the limit for the currency. By this point, I’m shaking my head. Oh my gosh, you got to be kidding me, but I keep going. I want to know more, I want to understand. Why?

Business schools everywhere teach the supply and demand chart. They are related and have an inverse relationship. Open up a new tab, and google it. Better yet, here’s a link with the search query ready to go.

So supply is set by engineers. The demand is set by the people using the platform.

Alright, more progress.

  • It’s a currency.

  • It’s used and taxed as a store of value.

  • It’s built on the concept of a decentralized system.

  • It follows the laws of supply and demand.

You may have noticed I used the term platform. That was intentional if you think hypothetically for a moment of cryptocurrency as a social media platform. The value in the platform is all the people that are trading on it. The demand. It’s 2019, yeah Facebook 2 billion users, Instagram 1 billion users, Twitter, Snapchat, etc., etc. Yep perfect, you’re following. Now, do you remember Friendster, MySpace, LiveJournal? In 15 years, we the people have moved platforms because it’s been easy to switch. Now imagine stepping into a world of everyone using cryptocurrency. No cash, just crypto.

New platforms or coins could pop up, and all the people could move from platform to platform. Then inflation and volatility would be insane! Ridiculously insane. Everyone would have to know what the heck was going on. Otherwise, they could go broke in a day. I think we could agree that we don’t want that future.

SCENARIO of hyperinflation & cryptocurrency

Let’s think through this together, say you got paid in this cryptocurrency only later to have to trade it for that cryptocurrency.

The organization you work for, the accountants would constantly be exchanging currencies and you would get paid in multiple currencies throughout the year.

Your accountants would hate it because how to do you calculate your wage or salary. Do you base it off the coin you were hired with? You’d hate it because every time you got paid, you’d have to spend all your money or continuously be switching to the then-popular platform or coin of choice. Not to mention, how you would know salary. Oh and forget about rolling over your 401k, and it’s underlying assets.

A week or two weeks later, and you got to switch to the new one now because it’s getting better value and demand is increasing.

This was my contextual understanding when I sat down to this fundraiser event.

We’re back at the table.

I’ve got so many questions. Come to find out they only knew about it because of JP Morgan's announcement around Bitcoin futures and this led to news of the returns people were getting. As I’m talking with the banker, I realize he starts asking me his questions, and I’ve got some of the answers to his questions. I’m becoming the subject matter expert on the topic! That’s not how I imagine dinner would go that night, but my wife could see I enjoyed having a good conversation.

None of my most in-depth questions were answered that night. That’s okay, I had already made my decision not to take a position.

I will consider investments, but I only invest when it makes business and systematic sense where I can follow the vision, logic, hope, and future. Does it fit and line up with what I want in the future?

Please note, I made a single speculative investment of $15 as a test on Coinbase, that I’m still holding. It’s lost $13 of value, but in the last few years, I learned a heck of a lot.

It’s been a few years since the hype, but you probably know that too. I’d say, what it means for us is that we need to think longer, and research further into a subject especially when it comes to speculative investing.

Did you speculatively purchase a cryptocurrency and lose money? Or did you grab popcorn and watch as the people got pulled into all the hype?

Travis DykesComment