As the cryptocurrency Bitcoin rallied again this week, opening Friday at $46,645.20 USD, Wall Street bank leaders have been discussing classifying Bitcoin as a “legitimate asset class,” CNBC reports. Does that mean it will function like so-called “real” money?
In a town hall meeting last month, JPMorgan co-president Daniel Pinto discussed the future possibility of accepting Bitcoin as an asset class. “If over time an asset class develops that is going to be used by different asset managers and investors, we will have to be involved,” he told CNBC. “The demand isn’t there yet, but I’m sure it will be at some point.”
Similarly, Goldman Sachs discussed digital assets last week with CEO and founder of the crypto firm Galaxy Digital, Mike Novogratz.
Bitcoin is 44k. How many people still want to tell me it's a bubble or "not real money".
— Cesare Coscia (@Cesare_C) February 8, 2021
All this comes on the heels of Tesla and SpaceX CEO Elon Musk announcing that Tesla had invested in $1.5 billion of Bitcoin and, perhaps more significantly, revealed plans to accept the cryptocurrency for Tesla electric vehicle purchases in the future. However, although smaller businesses already may accept crypto for purchases and it recently became possible to purchase not just Bitcoin but Ethereum, Litecoin and Bitcoin Cash through Paypal, embracing crypto as currency carries risks to both businesses and consumers.
Purchasing Consumer Products with Crypto: Risks and Rewards
“The risk comes with the volatility of the Bitcoin market,” says Daniel Polotsky, crypto expert and CEO of crypto ATM provider CoinFlip. “If a business is trying to pinpoint exactly what they’re going to get for the product they’re selling, volatility is a problem there.”
He tells GoBankingRates that the volatility also presents a potential problem for consumers, especially for individuals who are trying to plan ahead for big-ticket purchases. “If you’re going to purchase a car for $50,000 and the next day your crypto is only worth $30,000, you can’t necessarily time it right, so you could wind up short. Obviously, the way to mitigate that is to turn it into cash prior to making the purchase,” he explains.
In an act of pure alchemy unmatched even by Henry Ford, @elonmusk has driven up the price of bitcoin so much I can now afford to buy one of his cars.
— Rory Sutherland (@rorysutherland) February 10, 2021
Of course, then you’re using Bitcoin as an investment rather than currency. Either way, you’ll need to factor in capital gains taxes and losses. “Tax ramifications are one of the bigger challenges,” Polotsky says. “Every time you use Bitcoin, it’s technically a taxable event — either you lost on the value of the currency, or you gained on the value of the Bitcoin you used to buy something and then you have to pay capital gains, much like stocks.”
Using Bitcoin as currency can also pose challenges for businesses and consumers who like to budget carefully. “From a day-to-day standpoint, if someone absolutely needs a certain amount of dollars to pay their bills, it could be a bit scary,” Polotny says.
James Page, crypto technical writer for Crypto Head, agrees that there are tremendous risks to retailers and consumers alike. In an email interview, he told GoBankingRates, “A car is a big investment that could make Bitcoin the best choice to pay for it, but Bitcoin’s crazy price fluctuations could pose a major danger to any retailer who wishes to adopt it.”
Likewise, he said, “It might take a while until those who have made a profit trading in Bitcoin will use it to purchase a vehicle. At present, most people would not dare take the risk of such an expensive purchase.”
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Ryan George, chief marketing officer at Docupace, a platform that helps digitize operations in the investment industry, takes a different perspective. “Who says crypto is not yet viewed as currency?” he ponders.
“Right now, people are using cryptocurrency to buy and sell everything from [Sony] Xbox game consoles to Teslas,” he says, referencing private sellers rather than retailers. “Crypto is a currency because those who sell things swap it with those who buy things,” he says.
Bitcoin as an Investment
Whether you’re using Bitcoin on the private market to trade items with friends or viewing it as a buy and hold investment, it’s important to remember an important rule of investing: Diversification is key.
“I think Tesla’s acceptance of Bitcoin for purchases is part of the diversification strategy,” Page says. “This means that he sees as any other corporate buyer does. Tesla sees the merit of using Bitcoin. It’s a high risk and high reward investment, and lately, it’s been more rewarding.”
Polotny recommends that small businesses and retail investors alike follow Tesla’s lead and put a small share of their holdings into Bitcoin. “While Bitcoin is volatile day to day, it is the best performing asset of the last 10 years,” he says. “I think it’s more of a safe-haven asset than a currency today.”
The Bitcoin Revolution
Page also mentions the advantages cryptocurrency provides for investors who want to diversify. “The return properties of Bitcoin are somewhat different from the conventional asset classes, providing tremendous advantages of diversification,” he says. “If the popularity of Bitcoin or related digital currency greatly improves globally, it may affect customer and producer behavior and, as a result, actually change the nature of the monetary policy.”
This is where industry leaders and celebrities like Elon Musk investing in crypto and touting its benefits can make change. Although Musk’s recent tweets could (once again) land him in hot water with the U.S. Security and Exchange Commission, as reported by Forbes, it could also be the push crypto needs to gain widespread acceptance.
“Elon Musk takes calculated risks,” Polotny says. “He understands the financial revolution that is Bitcoin and understands how much this is going to help the world. By accepting it, he’s bringing legitimacy to Bitcoin and other cryptocurrency, which is something it definitely needs, being so new.”
This article originally appeared on GOBankingRates.com: Banks Might Treat Bitcoin Like ‘Real Money’ – These Experts Weigh the Pros and Cons