By: Liz Plot

The Ballast Point Financial Planning team has been getting a lot of questions about cryptocurrency, so we wanted to provide some guidance on how it can relate to your overall financial plan. John Oliver had a very informative and humorous take back in 2018 that cryptocurrencies are “everything you don't understand about money combined with everything you don't understand about computers." This article isn’t going to tell you how to create and mine your own currency but we can definitely help you understand the financial side of things and what we think about it.

Before we dig into the world of cryptocurrency, a few definitions:

Blockchain - This a sharable database that spreads ownership across a network of users, which makes it difficult to tamper with and more secure. You have probably heard this referred to as a “ledger” where the “block” is the record and the history of that record is the “chain of blocks”.
Cryptocurrency - This is the digital currency that is built using blockchain technology that generally only exists online (e.g. Bitcoin). If the currency is issued by a company, this is commonly referred to as a token (e.g. Ethereum).

Here are some of the reasons people choose to buy cryptocurrency:

Potential for high returns.
Possibly the currency of the future?
Blockchain technology may be more secure than traditional systems.
A decentralized system of banking (no bank or government control).
Digital currency may provide more privacy.
Possibility of the currency acting as an inflation hedge.

Reasons that purchasing cryptocurrency may not be for you:

Cryptocurrency isn’t backed by the government, meaning there is no obligation for the U.S. to step in if your currency is stolen or if you’re the victim of a scam.
If you use a digital wallet to store your currency and lose access to the wallet, it’s almost impossible to recover.
Scams are common: a coin called Squid was created based on a Netflix TV show and the creators walked away with over $3M in a scam referred to as a “rug pull.”
Theft is harder to trace. Certain types of digital wallets can reduce the risk of theft, but most applications and exchanges (e.g. SoFi, Robinhood, etc.) are common targets of hackers.
Cryptocurrencies haven’t been around as long as more traditional investments which means we have little to no information with which to analyze.
Cryptocurrencies consume a large amount of energy to mine, raising environmental concerns.

Keeping those pros and cons in mind, I want to tell you about my family’s currency experiment. Back in March 2020, my daughters were sent home from school to start the epic “Plot-family homeschooling experiment”. They were disappointed to be home with “Mami” (mom in English) and not at school cashing in their school’s currency called “Rudy Rubies” which students could earn and spend on prizes. My super saver daughters had saved all of their Rudy Rubies for big prizes, but with school canceled they weren't able to spend them. They were crushed.

In my attempt to ease their disappointment, I told them we could create our own currency, a system that we dubbed “Mami Money.” They could earn Mami Money the same way they had earned Rudy Rubies and we quickly set up a Mami Money store!

Mami Money and Rudy Rubies work because someone believes they have value. The moment my children decide that Mami Money isn’t worth what I’m charging (good deeds and kind words to your sister), the currency will lose its value. Alternatively, if the creator of the currency (in this situation - me) decides they’re done generating Mami Money, what happens to the value of the currency at that point? Or worse, what if they do a “rug pull” and run off with all the cool prizes they bought in the dollar section of Target?

This is the greatest challenge with cryptocurrency: just about anyone can create one (there are thousands!). It’s also a complicated, insufficiently regulated space and no one knows what will happen.

At BPFP, we encourage our clients to view any investment in cryptocurrency as a speculative asset. For the purposes of this article, we define a speculative asset that does not have any underlying or intrinsic value. Bitcoin, Mami Money, and even gold, don’t produce any tangible goods or services. (Although gold can be used to produce jewelry.) It isn’t an investment in a company like Apple that has revenues and sells iPhones.

As with any speculative asset, never invest money you can’t afford to lose. This isn’t an investment that you should expect steady returns. You are either shooting for large gains or are prepared to lose your entire investment. Similar to the returns of a small cap stock.

Thus, for most folks, this means allocating no more than 1-3% of their investable assets in this space.

Also, be sure you understand the currency that you’re buying as well as the method that you’re using to buy it (digital wallet or exchange). Many of our clients purchase cryptocurrency using an exchange like Coinbase.

Lastly, we must consider taxes. The Internal Revenue Service and most states are already taxing gains on sales of cryptocurrency. They will also tax you if you’re mining it, even if you don’t sell. If you’ve sold cryptocurrency this year (or bought and sold and bought and sold again) and need help with your tax situation, feel free to reach out to your lead planner or set up an introductory call here.

As for Mami Money, the kids are back in school but employed sad puppy eyes and hugs to ensure their favorite currency continued on. If you see Mami Money trading on a digital platform one day, you’ll know where it started!