Glenn Dayton Blog

Cryptocurrency: Not a long-term Investment

Glenn Dayton · September 25, 2017

Any investment growing over 900% in one year, is a phenomenon rarely seen. Later, in the same space, subsequent investments making over 8,700%, 3,850%, and 14,600% over an even shorter amount of time of 6 months is even more improbable. Yet this trend of hypergrowth continues to happen in this now almost predictable pattern. Welcome to the world of virtual currencies.

It’s not all peaches and cream. Virtual currencies fall as fast as they rise, Ethereum dropped from $310 to $0.10 in one day. $10,000 would have melted into barely enough to buy a coffee. Ethereum has since regained a large amount of its value and continues to follow a friendly sine wave trend. However, not all cryptocurrencies are as forgiving; Ripple, another popular coin, hasn’t recovered from its peak at $0.37 currently resting nearly above $0.18.

Despite tremendous growth and enormous amounts of media attention I still stand firm in believing that virtual currencies will never entirely replace real currencies. I’ll go further and say that I believe some convertible virtual currencies are dramatically overvalued, purely because of the lack of incentive to adopt.

Bitcoin opened the act, and several years later Ethereum stole the show with its faster transactional time, and deeper use of blockchain technology. Who’s next and what will they bring to the show that Bitcoin, and Ethereum couldn’t offer? And will the competition of the best virtual currency last forever? There’s now over 900 virtual currencies all competing, five times the amount of current currencies on this earth. Now imagine if virtual currency had been widely adopted, that is everyone converted their real money to virtual currency; what virtual currency out of the 900 and growing would most convert their money to? With the dollar replaced by virtual currency, overnight your retirement funds could retire before you as the battle of which 900 other and growing virtual currencies is the best. This chaos would continue until the government backs a virtual currency with gold. Yet, this government backing demolishes one of the main pillars that motivates the adoption of virtual currency: decentralization.

Another pillar that supports virtual currency is that the payer and payee can’t be identified. When a transaction is made the only information shared between both parties is the to and from addresses, digital signatures, and the amount transferred. However, anonymity is a huge misconception for most that convert their real currency into virtual currency through exchanges like Coinbase, Bitpay, and more. When signing up to an exchange they require personal information, including bank account details, credit cards, and more to begin converting real currency into virtual currency. Effectively grouping identities with virtual currency addresses in a convenient package for the FBI to subpoena. It is possible to maintain anonymity if the virtual currency is generated locally or the virtual currency is bought through a private party, but a majority of virtual currencies are handled through a non-anonymous payment gateway.

A non-anonymous payment gateway and exchange releases the wrecking ball and obliterates the 3rd pillar of what makes virtual currencies so attractive: taxes. Virtual currency anonymity doesn’t exist under most circumstances making it a very risky option to avoid paying taxes. The IRS recently cracked down on Coinbase requiring them to hand over users with $20,000 or more in virtual currency dating back to 2013. What was an attractive tax haven became an enormous inconvenient taxable electronic gift card. The IRS is cracking down on the issue at a exchange and payment gateway level. They’re targeting hubs where there’s large virtual currency flow. It is possible to exchange virtual currency person to person or generate them locally without being tracked, but it’s still illegal to avoid filing virtual currencies with the IRS.

The fourth and final pillar, cost, is bulldozed causing the virtual currency mega church to crumble in a swift fall as fast as it rose. Coinbase charges 1.49% to convert real currency to virtual currency and 1.49% to convert virtual currency to real currency. $100 gets reduced to $98.51 in virtual currency, and $98.51 gets reduced to $97.04 in USD. In total the set of transfers cost $2.96, something that’s free with regular banks. Virtual currencies make this transfer instantly, however Cash by Square offers the same instant transfer functionality for 1% of the transfer amount, still cheaper than virtual currency exchanges. My TDAmeritrade commission fees for investing in the stock market are a fixed one time $6.95 regardless of the size of the trade. The fee for currency trading on Coinbase is a variable 1.49% two time fee. A $100,000 investment with TDAmeritrade costs $6.95 versus $2,980 with Coinbase, and that’s not even including the additional percentage owed on returns. As with consumers, the cost for merchants is also steep to convert or replace their current payment terminals with the ability to accept virtual currencies. This added cost doesn’t make sense to merchants when a miniscule fraction of customers use virtual currency.

All of the inconveniences outlined above exist as a result of the necessary introduction of an exchange or payment gateway not the virtual currency. Taxes are tracked because the exchange records can be subpoenaed. Anonymity isn’t preserved because exchanges associate virtual currency addresses with user information. Third Party seizure of virtual currency is possible through a government order to the exchange. Transaction costs are still present and are charged by the exchange when converting virtual currency into real currency. Virtual currency can still be stolen, millions have been, an even bigger and more prevalent problem is forgetting or losing your password rendering your virtual currency useless.

Virtual currency is here to stay, not to grow.