Bitcoin and other cryptocurrencies continue to grow in popularity, but if you're considering investing in them, there are some key things you should know first.

Beyond learning the basics of cryptocurrency, investors should keep in mind a myriad of risks, including that the price of even the most popular cryptocurrencies is volatile, markets are not very transparent, transactions are irreversible, consumer protections are minimal or non-existent, and regulators are still figuring out how to regulate them. We do not recommend that investors wishing to invest in cryptocurrencies consider them as speculative assets using funds outside of a traditional long-term portfolio.

Let's take a closer look at some of the issues surrounding them:

What does the SEC take on cryptocurrencies? 

The Securities and Exchange Commission has generally been skeptical of cryptocurrencies, with chairs expressing concerns that the product is too volatile, that investor protections are inadequate, and that regulations are inadequate, although current SEC Chairman Gary Gensler has said on several occasions that he has no dealings. The transaction ideal objective is to try to invalidate them. The agency has rejected several applications by exchange-traded funds (ETFs) investing directly in bitcoin over the past few years. 

In August 2021, SEC Chair Gary Gensler said he was open to the idea of ETFs that invest in cryptocurrency futures, but not the spot market, as futures markets are already regulated by the Commodity Futures Trading Commission. In October 2021 the first two Bitcoin Futures ETFs—the Proshare Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF)—were approved and launched. Although a few others have followed, they have all been limited to Bitcoin and Ethereum, as these are the two cryptocurrencies for which an active futures market is currently established.

Will Bitcoin or other cryptocurrencies become the new global currency? 

Until there is proper regulation and consumer protection, we think not, but only time will tell. To be viable, a currency generally needs three characteristics: 

·        It can be used as a cheap, reliable medium of exchange;

·        It can be a unit of account;

·        It can be a store of value and respected legal tender as a means of payment.

As long as Bitcoin is subject to high volatility and hefty transaction fees, it seems likely that it will have only limited use as a medium of exchange, unit of account or store of value. Another obstacle to wider public acceptance as a true currency is that, as cryptocurrencies become more widespread, the risk of regulation increases – removing part of their appeal to investors who perceive them as a currency not governed by central bank policy. National governments.

Can Bitcoin be used as a hedge against inflation? 

Because the value of Bitcoin is not currently tied to the value of a basket of goods or services, its value as an inflation hedge is speculative and unpredictable. Throughout 2021 and 2022, Bitcoin has experienced both sharp rallies and sharp price declines even as inflation data has been consistently higher. Whether Bitcoin will prove to be an effective inflation hedge, in the long run, is yet to be determined.

How is cryptocurrency taxed? 

The IRS currently considers Bitcoin to be property, not currency. Cryptocurrency transactions are taxable by the IRS whenever a taxable event occurs, such as selling bitcoin for a fiat currency, paying for a product or service with bitcoin, or trading it for another asset. Currently, investors are responsible for tracking profits and other reporting on a cost basis. For help, read IRS Notice 2014-21, or consult a tax advisor. 

However, the Infrastructure Investment and Jobs Act of 2021 (IIJA) which was passed in November 2021, requires cryptocurrency exchanges to report cryptocurrency transactions on Form 1099-B beginning in 2023. Additionally, IIJA requires a currency exchange of $10,000 or more. The IRS, similar to the current Form 8300 reporting requirements for cash transactions, begins in 2023. However, it is important to note that this $10,000 reporting requirement does not mean that cryptocurrency transactions of less than $10,000 are not taxable. The tax code states that "all income from any source" is taxable, even if it is not reportable to the IRS. For example, a person who sold $500 worth of items at a flea market owes tax on the income, even though it was not reported to the IRS on a Form 1099.

Are cryptocurrency trades subject to wash-sale rules? 

Tax experts believe that because the IRS currently considers cryptocurrencies to be property, not securities, and losses are treated separately from stocks and mutual funds, the wash-sale rules generally do not apply. However, as new rules are proposed and adopted, the IRS and SEC may issue new guidance on this matter in the future.

What are some of the risks of Bitcoin and cryptocurrencies? 

·        Financial loss. The price of Bitcoin and other cryptocurrencies has historically been extremely volatile, and fluctuations can result in significant losses if sold at the wrong time.

·        Future regulations. Issuing and trading cryptocurrencies is currently not well regulated and additional oversight and regulation is likely in the future. US Treasury Secretary Janet Yellen has cited her concerns about cryptocurrencies being used for "illegal financing".

·        Fraud and Cybercrime. This has already happened. Given the above concerns, cryptocurrencies may come under investigation from the Financial Crimes Enforcement Network (FinCEN) for non-compliance with the Bank Secrecy Act (BSA) and anti-money laundering requirements. Bitcoin exchanges have suffered computer outages due to overwhelming demand, and because ledgers are kept on the Internet, a large-scale cyber attack could limit access in an emergency – something unlikely with cash or gold.

·        theft or damage. A login ID and password is usually required to access a cryptocurrency exchange. If it is lost, hacked or stolen, access may be denied or lost. Although unusual, bitcoins can be stored in physical wallets, so they can be spent without a computer; This creates the same risk inherent in all cash: they can be lost, stolen or destroyed by accident. 

Does Schwab recommend investing in cryptocurrencies? 

Bitcoin and other cryptocurrencies are speculative investments in our view. We do not believe that Bitcoin fits the traditional asset allocation model at this time, as it is not a traditional commodity like gold, nor a conventional currency. Bitcoin's dramatic volatility is largely driven by supply and demand, not intrinsic value. Bitcoin has no revenue or earnings. It does not include the price-to-earnings ratio, price-to-sales ratio, or book value. Traditional quality metrics don't apply, so there's no way to measure the quality that we support or encourage.

Whether you should invest in cryptocurrency depends on your goals and preferences as an investor, just as it does with any asset or security. We recommend that clients use this as a speculative investment and consider the high volatility and risk involved. For those who already have a diversified portfolio and a long-term investment plan, we see cryptocurrency ownership outside of traditional portfolios.