Currency may be defined as money that passes between two parties with a fixed value. Since the beginning of time, currency has facilitated transactions between a buyer and seller. Regardless of the product changing hands, monies are necessary and agreed upon by both parties to make the transaction possible. It’s important that currency has a stable and agreed upon value so both buyer and seller feel confident in what they are exchanging. From what I can tell today, stability in price is not a feature that most virtual currencies offer. In fact, in most cases, values rise and fall daily often without explanation or reason.
Additionally, a currency should be transparent so its value may be known to all. This allows the coin or token to be relied upon when spending. Ease of access and wide acceptance by users is necessary for a currency to be adopted. Having abundant supply is necessary so a system of exchanges may take place. There should be enough currency for everyone and a marketplace to purchase more when necessary. A currency works best when it offers accessibility to all regardless of how much you choose to hold and spend.
As I see it, there are too many drawbacks to using virtual currency for spending today. The scarcity and clouded marketplace of exchanges accompanied with exorbitant fees is a big hurdle to overcome. Unless that changes or another digital solution arrives that removes the mystery and creates abundance, it will be difficult for these currencies to be adopted for everyday spending IMO.
Perhaps virtual currencies might be better categorized as an investment? Investments by design include something that you purchase today with the idea (and hope) that it will increase in value over time. Regardless of what you select as an investment, time determines its worth including potential gains when you ultimately decide to sell. Not all investments need to be sold, but sooner or later cash flow or the need for income makes a sale necessary. Looking around today and guessing about tomorrow, I don’t get the impression those invested in virtual currency will be quick to sell given the limited supply. This lack of supply fuels demand as the fear of missing out (FOMO) drives prices upward. Human nature being what it is, I imagine most investors may attempt to purchase as much as possible and avoid selling at all costs. Their digital currency and the potential gains in their eyes outweigh the need for cash and income. How long may that last before they must convert some or all of the virtual currency to cash? What’s the purpose of an investment if you cannot capture gains? What might the tax impact be when that takes place? For the first time in history, page one of the 2020 1040 tax form requires disclosing virtual currency transactions and activity. It will be interesting to see how this plays out over time.
With so many unknowns, I’m not convinced virtual currencies are a good investment. For what it’s worth, I don’t own any in my portfolio. The purchase process and maintenance of records and security so it doesn’t disappear seems to require more attention than I’m willing to give it. The liquidation and costs to transfer to cash are too vague for my liking.
Instead, I’ve taken a more traditional route to building wealth. My portfolio is assembled based on a date specific duration specific plan around my family’s goals and priorities. Short term cash reserves accompany long term ownership of many diverse companies here in the US and abroad. No individual stocks or bets, just an appropriately allocated number of exchange traded funds. This portfolio has remained, for the most part, unchanged for decades, as its rebalanced annually. Our family goals and objectives have remained consistent, and I see no need to adjust my portfolio or chase a potential investment return simply for more. This tortoise approach to financial planning is extremely boring, but very reliable. The real secret to building and retaining wealth is giving yourself time, a repeatable process, and diversification in your investments. This allows you to capture gains overtime in efficient markets designed to reward the patient investor. If you’d like to learn more about what a plan may look like for you, reach out and let’s chat.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.