This is our crypto currency update for the last quarter. At the time of our April update, the leading crypto – Bitcoin – was trading for around $62,000 per coin. As I write this post in early July, that price has now declined to just over $33,000 per coin or a drop of about 47%. This price change again shows the volatility of crypto.
Here are some of the key developments reported in the financial media that have occurred since our last update.
China Crackdown
China intensified its crackdown on crypto, including bans on mining and trading. This effort has forced mining operations to shift to other areas outside of China. The Chinese government has publicly announced it plans to introduce a digital currency tied to its fiat currency.
China is currently the world's largest bitcoin mining location, accounting for over 65% of mining according to the Cambridge Centre for Alternative Finance. The country has previously stated it would target crypto as part of its pledge to reduce carbon emissions.
Environmental Concerns
Numerous articles have been written about the high energy consumption and negative environmental impact of Crypto miners. To produce coins these groups employ sophisticated, energy intensive computers to solve complex algorithms. Critics see the massive electricity consumption of crypto-mining operations as a problem. The energy used by these crypto operations has a large portion come from coal-fired power plants which produce significant CO2 emissions. There is an increasing drum beat for miners to use less traditional or renewable sources in their operations.
Celebrity Social Media Posts
Many investment professionals and members of the media are concerned about the impact of celebrity tweets and posts on the values of crypto. They ask how these currencies can be a store of value or an asset class if their value can dramatically change based simply on a tweet or post. For example, Elon Musk has become wildly popular in the crypto community, and it sees him as its biggest booster. After a recent appearance on Saturday Night Live, the value of Dogecoin dropped based on his comments.
With media comments and tweets, celebrities like Musk have influenced individuals to either buy or sell virtual coins. Reactions to these actions has caused crypto to have added volatility.
Crypto Investments in Your 401(k)
During the last two months, there have been reports of a number of 401(k) plans offering the ability to invest in crypto currencies either directly or indirectly as part of their investment line-ups. If this is something you want to do as part of your retirement plan, check with your plan’s administrator to see what your plan offers. One of the latest entries in this field is a 401(k) plan run by ForUsAll. During June, its 401(k)s began to offer access to more than 30 cryptocurrencies. ForUsAll puts some restrictions on the process. An account owner can put no more than 5% of the accountholder’s portfolio into cryptocurrency. Before you make such an investment, please revisit your investment risk tolerance and understand the volatility in crypto values.
El Salvador Adopts as Legal Tender
Lawmakers in the Central American country’s Congress voted in favor of the Bitcoin Law. CNBC reported that the law reads: “The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out."
Prices in the country can now be shown in bitcoin, tax contributions can be paid with the digital currency and exchanges in bitcoin will not be subject to capital gains tax. It’s still unclear how El Salvador will ultimately roll out bitcoin as legal tender.
Summary
Overall, my view continues to be that crypto currencies have emerged from the darkness, are a new asset class and are getting serious consideration by knowledgeable parties. I believe the key to owning this new asset class is making sure it matches your risk tolerance and that it is part of a well-diversified portfolio. This means proceed with caution and do your research before parting with your money.
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