What is Cryptocurrency?
By now, you have most likely heard of Bitcoin, a term that is often used synonymously with cryptocurrency. While there are many forms of cryptocurrency, it is generally a digital currency, with a unique feature whereby ownership records are stored in blockchains, a type of encrypted storage. While cryptocurrency shares some features of currency, it is not a traditional currency. They are not regularly issued by a central government authority. That is why you may have heard of them referred to as decentralized currencies. A few countries, including El Salvador, have even gone as far as tying cryptocurrency into their own economy – more formally.
Starting with a Plan and Goals
If you are reading this post on estate planning, you are most likely a planner yourself. Just as your estate plan is part of your overall life plan, your cryptocurrency plan would fall under your estate planning. And it happens that the beginning of the year is a time when many people find it appropriate to review their estate planning. (See our post on New Year’s resolution estate planning).
The purpose of estate planning for many individuals is to provide for loved ones’ needs and dreams in the future. Other goals include preserving assets, minimizing taxes, avoiding probate, and dealing with incapacity. Quantifying and prioritizing these goals are easier said than done; and starting the conversation is sufficient enough to allow investment decisions.
The purchase of crypto assets by an estate will obviously impact the value of the estate and impact any risk-reward determinations that have been made in the past. It is appropriate to reassess that plan, particularly if the value of some of your asset classes have increased or decreased significantly.
Further, it adds a factor of complexity to managing the assets that is par for the course for new financial instruments. Over time, regulation will likely increase, which may increase the administrative burden. This is a tradeoff with the instability and volatility which presently characterizes cryptocurrencies.
If we know anything about cryptocurrencies, we know that they have fluctuated significantly since their inception. The LA Times has reported that there are over 7,500 cryptocurrencies available and that they are worth whatever buyers and sellers say they are worth. (LA Times, Beginner’s guide to Cryptocurrency.) They report further that there were 2 “boom-and-bust” swings in 2021 alone. One researcher warns that the value is sensitive to geo-political risks, tax burdens, inflation, and stock prices. There is also sure to be significant business and civil litigation in these early years of cryptocurrency. These are factors to keep in mind when evaluating the role of this investment.
How to Invest
One of the trickier aspects of cryptocurrencies is purchasing the currency or opening a position. More and more, mainstream commercial banks are entering or endeavoring to enter the field and many people are sitting on the sidelines because their current institution does not provide support for transactions.
This landscape is changing on a daily basis and picks up speed nearly proportionally to the speed of people investing in the coin. Nowadays, people from all walks of life have invested in cryptocurrency. Other investments that also rely on blockchain technology, like NFTs (non-fungible tokens), find advantage with the ledger-based nature of the concept.
The current process used by many is to set up an account on a cryptocurrency exchange, like Kraken or Coinbase. One of the country’s leading broker’s, Charles Schwab & Co., at this point in time does not spot-trade currency, though it does facilitate several options for investment, such as cryptocurrency trusts, futures, and stocks of companies related to the industry.
Guard the Key With Caution!
Owing mostly to the digital nature of cryptocurrencies, the encryption and security of your investment is not open to negotiation. You cannot walk into a bank with an identification and withdraw your assets. The news is filled with stories of people who have lost their password, or the digital key to their wallet (a wallet is what they call a device, hardware or software based, that stores your passwords or digital keys – sometimes it can be a usb stick, which are notoriously subject to being misplaced).
James Howells, a 35-year-old information technology engineer from Newport, Wales had purchased 7,500 bitcoins, a very large amount (at the time of this writing, they are worth a few hundred million dollars). He stored the “cryptographic” private key on a laptop computer hard drive. He mixed that hard drive up with another one, and accidentally threw it in the trash. Since he purchased the bitcoins, some eight years ago, they have appreciated considerably. Howells believes that if he recovered the hard drive from the landfill, he would be able to retrieve the digital information necessary to prove his ownership of the bitcoins. He has offered several philanthropic measures if the local city council allows disruption of the landfill and retrieval of the hard drive. A hedge fund has even gone as far as offering to pay for the excavation.
Cryptocurrency Tax Implications
This year, Form 1040 will ask tax filers to report any 2021 cryptocurrency transactions. Digital currency brokers are also increasingly asked to report more information. We recently wrote about non-cryptocurrency-related legislation that was proposed last year. (How it might impact you.) Although we did not mention some of the changes that relate to cryptocurrency, we have tracked them and can discuss them with you. We may write expansively about these changes in a blogpost later this year if there is sufficient interest.
Finish with FUN
At the end of the day, once you have identified your allotment for assets that carry this amount of risk, you may find enjoyment in watching how the events playout.
Do the geo-political risks and economic policy, as mentioned above, increase volatility, or stability?
Do they deliver the goals that you are interested in achieving?
Many people will be more satisfied not monitoring the turn of events and checking in annually to readjust portfolios, as needed.
If you have more questions about cryptocurrency and estate planning for you or a member of your household, please contact a lawyer for legal assistance. Call the trusted estate planning attorneys at Lowthorp, Richards, McMillan, Miller & Templeman at (805) 981-8555 or fill out our online contact form. We operate primarily in the Tri-Counties area – Ventura, Santa Barbara, San Luis Obispo.