On May 22, 2010, Laszlo Hanyecz posted in a Bitcointalk forum “who will buy me two large Papa Johns pizzas and deliver them to my house in exchange for 10,000 Bitcoins?” A British man in Florida agreed and delivered them. The pizzas totaled $25, and the value of the Bitcoins exchanged was worth $41. Today, the two “pizzas” are worth $330 million. Laszlo is still humored by the transaction telling the NY Times, “It wasn’t like Bitcoins had any value back then, so the idea of trading them for a pizza was incredibly cool.”
What is Cryptocurrency (Crypto)?
Cryptocurrency is a digital currency used to purchase goods and services. These transactions get logged on a secure online network called a blockchain. Cryptocurrency has been around for a little over ten years, so it does not have the history behind it such as, Stocks, Bonds, Commodities, etc. Cryptocurrency became increasingly popular in 2020, with the US stock market dropping 35% and fears of a prolonged recession. Then, it stayed popular with $6 Trillion of stimulus injected into the economy. Many other cryptocurrencies erupted from this influx of money, and prices soared. For example, Bitcoin rose over 300% and was worth $65,000 at its height in April 2021. However, it has since fallen 33% to 41,000 in 2 months.
Moreover, crypto is not classified like typical currencies such as US Dollars by the IRS. Instead, the IRS classifies cryptocurrency as an asset like a stock or bond, which means it has a cost basis and has capital gains or losses when sold or used in transactions.
A significant reason crypto has become popular is there are no central banks or sovereign governments involved. Also, many people see crypto as the future of transactions and are racing to buy them. Others like the appeal of blockchain technology which is more secure than traditional payment methods. Lastly, speculators see it only increasing in value and use it as a “get rich quick” method of investing.
Does Cryptocurrency Fit in Your Portfolio?
It depends. Cryptocurrencies are not like traditional investments. Most buyers see them as speculations as crypto produces no cash flow. A business or a stock with good management creates value and cash flow, increasing an investor’s wealth. Second, there is hyper volatility in the price of crypto. It can have multiple double digits of gains or losses on any given day. Elon Musk, the founder of Tesla, has moved the crypto market by over 10% up and down with one tweet. Most investors could not stomach watching their portfolio go on a rollercoaster ride each day. Lastly, crypto is the currency of choice among underworld organizations. With no central government or bank regulating cryptocurrency, it gets funneled to purchase illegal activities.
However, crypto could be the currency of the future. We do not know what money will look like in the future or if governments will create their own cryptocurrency. El Salvador has declared Bitcoin as a legal tender currency. Also, with only a finite number of Bitcoin (21 million coins) that creates a supply and demand situation where demand will cause prices to increase once the supply runs out.
What is the Answer?
Each person has a different risk tolerance and assessment about their portfolio. Some are fine taking huge risks, while others cannot sleep at night. Therefore, I would advise not to purchase cryptocurrency unless you meet the following:
- Have a large emergency fund.
- The retirement portfolio is set or on pace.
- Use entertainment allowance from your budget.
- Realize this is a considerable risk and once it is gone, move on.
- Remember, this is speculating, not investing.
- Never do over 2-3% of your net worth.
If you meet the criteria, enjoy, like you were in Las Vegas! Or, instead, do not invest in crypto and take a trip with your spouse to Las Vegas!
P.S. While writing this article in the month of June, the price of Bitcoin has gone from 36,600 to 41,000 and as of today back to 30,000.