Should you care about Bitcoin and crypto?
You’ve likely heard about cryptocurrencies, especially Bitcoin, which grew in value from $1 to $31 the year it launched (2009) and reached a value of $60,000 earlier this year. Those sorts of numbers definitely grab headlines. But even if you have the money to invest, there are some things you should know about crypto:
What is cryptocurrency?
It’s a type of digital or virtual currency exchanged between people on the internet. There are no physical bills or coins. And unlike other forms of currency, “crypto” is not backed by any central banks or nations.
Where did it come from?
Bitcoin was invented by someone who goes by the fake name Satoshi Nakamoto, who published an academic paper in 2008 titled, “Bitcoin: a Peer-to-Peer Electronic Cash System.” Other forms of cryptocurrencies existed before Bitcoin hit the market in 2009 and still exist today, but Bitcoin is the best-known.
How does it work?
A number of companies, like Coinbase, Gemini, PayPal, and Robinhood, enable regular consumers to buy cryptocurrencies and hold them in a digital wallet. Transactions are recorded on a digital ledger, known as a blockchain.
But cryptocurrency is more of an investment strategy right now than anything resembling a replacement for day-to-day purchases. The list of places where they can be used is constantly changing. For instance, Tesla started accepting Bitcoin as a form of payment in February of 2021 but stopped three months later. Some countries accept their use (the United States) while others ban them (China).
What are the risks?
Since most people benefit from a low-cost, diversified, passive approach to investing, Bitcoin and other cryptocurrencies pose risks for a number of reasons.
- Since Bitcoin and other cryptocurrencies are still experimental, they do not offer advantages relative to other forms of payment in most contexts, like storing short-term cash or making payments on household affairs.
- Cryptocurrency prices have been highly volatile.
- Their value depends on what other people believe; they can become worthless at any time if other investors stop valuing them.
- Since there are no physical Bitcoins and they operate digitally only, and independently of a central bank, the potential for fraud is high. The U.S. Securities and Exchange Commission (SEC) has cautioned against them.
- There is uncertainty about how digital assets will be treated by government regulators and tax authorities across the globe.
Regardless of your interest in crypto, if you are thinking about investing or already have an investment portfolio, work with your Brightside Financial Assistant to make sure your current plans align with your overall financial goals. (Note, Brightside does not provide specific investment advice.)
Brightside Client Story
Nelson came to Brightside to see if he could use his stocks to pay for his children’s college expenses. He had a Parent Plus student loan due for his child’s tuition that would cost him $3,000 a month. He also had two other children in high school that he wanted to plan for so he could pay for their college expenses as well. Nelson thought of selling stock to cover costs and wanted to know if there were any strategies for minimizing taxation. He contacted his Brightside Certified Financial Planner, David, for help.
How Brightside Helped
- Nelson and his FA calculated how many stocks he could sell before crossing into a higher 32 tax bracket and discussed splitting the stock sales between tax years to ensure he would stay under the Alternative Minimum Tax exemption amount.
- Nelson’s FA educated him on 529 plans and benefits for college savings for his two children still in high school.
- They discussed contribution limits per beneficiary and gave guidance not to exceed the $15K gift tax limit.
- Nelson’s FA researched state tax deduction, finding that the “Path2College” plan in his state of Georgia allowed for joint filers to get up to an $8,000 state tax deduction per beneficiary.