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#8 Why We Discourage Crypto Speculation Thumbnail

#8 Why We Discourage Crypto Speculation

Emily and Amanda discuss various arguments against jumping into crypto. With all the buzz surrounding crypto, we are getting more and more questions about how to navigate it. The key is to find reliable and neutral sources for research that is not pushed by people who are trying to sell it.

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  • Emily & Amanda highlight the importance of considering non-salespeople as sources of when examining crypto.  Here are a few recent examples:
  1. Jason Zweig examines the difficulties in diversifying amongst the various crypto tokens: You Can Get Crypto Right and Still Play It Wrong, An irony of investing is that you can be correct about the future and still fail to profit from it.
  2.  This piece examines the regulatory and financial risks of being an unsecured creditor to crypto-exchange: When Crypto-Exchanges Go Broke, You’ll Lose It All The fatal flaw in the ‘neither fish nor fowl’ gambit.
  3.  Tressie McMillan Cottom looks at crypto from a sociological lens in this series of essays: The Strange Allure of the Blockchain
  4. This piece examines the controversy of Tether and asks whether it is a bubble: Is Tether Just a Scam to Enrich Bitcoin Investors? A widely used cryptocurrency can’t escape investigation and controversy—and it may be fueling another coin bubble.

Emily Agosto (00:08):

Welcome to Connecting the Dollars, a personal finance podcast. I'm Emily Agosto, a CPA and financial advisor,

Amanda Vaught (00:16):

And I'm Amanda Vaught attorney and financial advisor. Both Emily and I are co-owners at Propel Financial Advisors.

Emily Agosto (00:25):

Propel Financial Advisors is an investment management and financial planning company. We are fee-only fiduciaries and independent registered investment advisors. I'm based in Chicago and Amanda is in New York city, but we work with clients nationwide.

Amanda Vaught (00:40):

The purpose of our podcast is to explore personal finance topics, including budgeting, investing, behavioral finance, current events, and other helpful information. We also hope you'll get to know us along the way.

Emily Agosto (00:54):

Thanks for listening. Hello everyone and welcome to our crypto episode. We had a few technical issues with our originally recorded intro. So we're just gonna jump right into the conversation.

Amanda Vaught (01:09):

We are getting questions from clients. Should we, should I buy cryptocurrency? What is the deal with cryptocurrency? Those types of things. So hopefully we can cover a lot of that ground today.

Emily Agosto (01:23):

So can we start out just with maybe a general background of what is cryptocurrency

Amanda Vaught (01:29):

Cryptocurrency is a general term for different types of tokens, crypto coins, like Bitcoin, Ethereum, Doge coin. There's all different types out there. Probably Bitcoin is the most popular and I believe is the oldest. They it's a form of digital currency. I, I mean, I'm hesitant to use the word currency. I mean, people call it currency, but a lot of people say that it doesn't really meet the definition of a currency because a currency is supposed to be a stable store of value. And if you've seen any of the price movements in the crypto markets, you've seen that the price is not stable. It's actually quite volatile. I'm hesitant to use the word currency, but it, that is sort of a common term to say crypto currency. And then it uses what's called blockchain technology and the blockchain technology is a way to replicate sort of like a financial ledger to show ownership of the underlying token in the blockchain. And so it's a way that you can do transactions, you know, person to person without a third party in there, like a bank, right. Being privy to your transaction. So that gives rise to the privacy that a lot of crypto people tout as a benefit of using crypto.

Emily Agosto (03:00):

Yeah. I was actually gonna ask about that. So in the research I've done a lot of the pro arguments for digital currency for cryptocurrency have been that it's so much more private and decentralized. So that's pretty much the main one. The second one is that it's, it can be faster than a typical transaction. Like sometimes you have to wait for transactions to settle through your bank in order to access your funds. So there's an argument that it's a faster potentially. The third one that might be the most compelling is that a lot of people are saying it's, it's not something new anymore. And it's been a really good performing asset class over the past few years. So I can give you three arguments there, but let's start with the privacy issue.

Amanda Vaught (03:50):

Okay. Well, yeah, I think for privacy, I mean it is private, right? Nobody can see what you're doing and there's pros and cons to that, right? Mm-Hmm  one pro argument is if you are a political dissident in China and you would like to give money to some kind of political organization that's working against the government then that's a way to do that without the Chinese government knowing about it. And so there are, you know human rights implications there, but also, you know, crypto is known for criminal element using it. And, and they take advantage of the privacy on that side for just like regular, every people who, you know, aren't concerned about human rights or using crypto for criminal enterprise the ability to skip using the bank, they'll say, oh, that that's, that's great. It's decentralized. I don't have to go through the bank, but we also have to keep in mind, you know, what, what is the role of the bank in our society and is, you know,

Emily Agosto (04:59):

So the downside of these private transactions is that if you are a victim of fraud, or if someone steals your digital currency, there's no recourse.

Amanda Vaught (05:11):

Yeah. So just, you know, an issue with the privacy is that, you know, it's a private transaction, but it's also could be private that you actually own this crypto. So that gets into a lot of issues like estate planning. What if you pass away abruptly and nobody knows that you own this crypto it's just gone. Yeah. You know if you have it, and it also depends on there's different ways you can store the crypto, you own like with a digital wallet, or you can just store it on like a USB thumb drive depending how you store it can affect if say your beneficiaries are able to access it or get it. And then it's also, you know, can be stolen. So if it's on a thumb drive and somebody just comes and takes it from you, it's gone, or if it's stolen you know, if it is in a, in a digital wallet or it's in the cloud somewhere, and somebody hacks in and takes your, your crypto, you don't have any way to prove that that was yours or to recover it because a lot of these crypto assets are not insured.

Amanda Vaught (06:20):

There is no, that's a side effect of the decentralized system, right? There is no FDIC insurance. If, if it's a bank and you know, they have cyber security or they have physical security at a branch, you know, and, and if somebody, it takes your money or steals your money, it's insured, you can get your money back. Right. So you lose a lot of that, that protection that the banking system offers.

Emily Agosto (06:47):

Right? Yeah. So that second point then that people are saying it's faster and you don't have to wait for your funds to settle before you can access your cash. Mm-Hmm  Do you think that is a pro?

Amanda Vaught (07:00):

I mean, I think it just depends, right? I mean, if you, you're doing a person to person transaction, so if you're just trying to buy something at a store and you need to exchange your Bitcoin for something else, you have to wait for this mathematical puzzle process they have in place for the exchange to happen. So that's not really slower. I mean, excuse me, that's not really faster than say swiping your credit card. But if, you know, you could say that some of the transactions at a bank are delayed. Say, if you do like a wire transfer to another country, that takes time because there are banking regulations in place. Like your bank has protections in place for terrorist money movement. They have know-your-customer laws, different countries have different rules that the United States where we are doesn't have that, that the banks have to comply with. And all those types of banking regulations, you know, can slow down transactions from happening. But you also have to say, is that really a bad thing? Yeah. Or, you know, those regulations are there for a reason. Right.

Emily Agosto (08:15):

I think the, the most regulations we've seen in the last few years of all have been around wires, or at least like third party transactions. So that is a good point that, yeah, you might get your money a little faster, but you're also missing out on some protections there. And also, and you're not

Amanda Vaught (08:34):

Facilitating money laundering. Right. Right. I mean, yeah. And also, I mean, most people don't want to do that.

Emily Agosto (08:40):

I don't know how many people I do business with have cryptocurrency or digital wallets that I would be interacting with in the first place. I mean, I, I do assume that is going to change in the next few years. Probably a lot, but currently, yeah. I don't, I don't know that I see that as an argument a positive argument for crypto at this moment.

Amanda Vaught (09:03):

Yeah. And I think a lot of people in crypto will argue that it, you know, it's gonna change. It's gonna come. And it, that could be true. Mm-Hmm , I don't know the future, you know, Bitcoin has been around for 13 years and it has not been widely adopted as a currency. I mean, we'll see.

Emily Agosto (09:22):

Yeah. So that third argument I mentioned is that it's been a high performing asset class over the past few years. It's not something new. And that we should be scared of. Yes. It's volatile. Guess it's still considered speculative, but compared to things like, what are some other asset classes that are highly speculative or have been like real estate perhaps?

Amanda Vaught (09:46):

Yeah. I, I, I don't it's hard because I don't think of, I don't think of crypto really as an asset class necessarily because it's not there's no. How do you value it? It's really hard to determine what that underlying value is. I mean, there is some value there. Some other person maybe has worked on this problem, but with real estate, you can say, you know, there's value in the land there's value in maybe there's underlying minerals land. Maybe it's a housing, a house on the land, or, you know, farmland, whatever the case is sure. With the real estate. And then that has some kind of value that, that you recognize or other people recognize. And then you could go from there, I think for, for crypto, because it's so speculative, it's just, it's just in a different category. Yeah. And it's hard to compare it to traditional investment products, either real estate, stock market, bond market, venture capital, even whatever the case may be. Sure.

Emily Agosto (10:51):

So it's almost like, should you even think about this as an investment or should we think about it more as gambling or entertainment?

Amanda Vaught (10:59):

Yeah. Well, I think it depends on the person. I tend to fall on the side of entertainment or gambling because I don't personally believe that really in the story of crypto that it's going to change society for the better. I don't, you know, really buy into that. I think the underlying technology is interesting. But just because the technology is interesting doesn't mean that it's gonna be good, or better than what we already have. So that, that reveals my bias there, which, you know, I think is fine because so much of the information on crypto out there is from people trying to sell you crypto. And they're just gonna talk about how great crypto is. And so if you're listening to this, you know, hopefully you heard some of the other arguments that maybe it's not so great. Or maybe it could be great one day sorry

Emily Agosto (11:56):

To put you, but those all

Amanda Vaught (11:57):

Like that. Yeah. That's okay. But I think these are all things. If you are thinking about investing in anything that you need to research it and, and really look under the hood, and see what it is. And with crypto, they're so much there that requires research and learning new words, like what's a gas fee, you know, like mm-hmm, , what is that? What is Ethereum and why is it different than Doge coin? And which, I mean, there's so many different things out there to look into and figure out how do you do this? Is this right for me? And if you're listening to the majority of the information out there, it's just pure advertising, it's not informational. It's just, you should use this service. You should buy this coin because that's what that person is selling.

Emily Agosto (12:47):

Yeah. And everything, it, it seems like it's this exciting new thing. And so of course people are interested, but as Amanda said, the education is really important and it's not over only educating yourself. But if you have someone you trust or a financial advisor, you work with, I mean, have a conversation with them too. Even though we're not necessarily recommending it right now to clients as a part of a core financial plan or portfolio, we're still educating ourselves about it. We're still keeping up on all the news around it. And yeah. Mm-Hmm so I think it's important, even if you don't think your financial advisor thinks it is a good idea, but you wanna learn more, might as well ask them it's better. They know about it. Like if you do own some then than not knowing about it. Yeah.

Amanda Vaught (13:37):

I think it's true. I mean, I don't think as a financial advisor, that our role is to tell people how to spend their money. You know, our role is to advise them, you know, if you choose to spend your money this way, then you know, that's gonna cut into other things that you might want to do with your life, which is fine. And then they'll say, okay, well, I still wanna do this and that's fine. It's your money to do what you want with it. Like exactly. I don't advise somebody to go buy a boat, because I would never want to own a boat. That doesn't mean you shouldn't buy a boat. You know what I mean? And you find it entertaining and you like it, then go for it. But I would put crypto in that, in that category, like if you're gonna spend money on crypto, maybe then you can't afford a boat or maybe it will go up a price and you'll be able to afford five boats. What do I know? But I don't think it's, it's, you know, it's not really an asset class that I would think of as a traditional sort of investment that we would advise on investing in. It's more speculative and it's more for fun and entertainment than anything else at, at least at this point.

Emily Agosto (14:48):

Right? Yeah. At least that's, that's kind of what we're thinking right now. If your goals are to save for retirement, we wouldn't necessarily recommend something so speculative, even if you did think of it as an investment. So it's really just kind of taking a step back, looking at the big picture. Yeah. And not just falling into the trap of this new, exciting thing that's out there. 

Amanda Vaught (15:11):

Yeah. Yeah. For sure. So after you do a lot of research into the crypto area and decide that you do wanna go forward with buying some crypto assets, there's a couple things we want you to look out for. One of them is scams and another one is fees.

Emily Agosto (15:28):

Yeah. So on the scam side of things, there, a lot of fraudulent activity. According to CNBC over 10 billion in cryptocurrency was stolen in just 2021 alone. So that's, that's not something to ignore.

Amanda Vaught (15:44):

No. and especially people new to the field don't necessarily know how to recognize these scams. So just be very, very careful with that. Yes. And then the other one is fees that could come with crypto transactions depending on the exchange you use. There's a few different choices out there, some charge different fees. Some are, you know, two and a half percent per transaction, which can really add up if you're doing a lot of buying and selling in the crypto space. So please just keep your eye on those different fees when you're deciding which exchange to use.

Emily Agosto (16:20):

Yep. Good point.

Amanda Vaught (16:23):

I think that's good, Emily. I think we covered a lot of the major points. Yeah, I do think, you know, even if we say we don't advise it and someone has bought it anyway that's fine. We don't, we don't judge people who do that. No, not at all. We just want you to enjoy your life and you know, as best you can. Yeah.

Emily Agosto (16:43):

We wanna help you reach your goals. We don't wanna, right. So yes, yes. Wrapping up here, Amanda has a blog post talking about some of the things we've discussed today. So we'll link that in the show notes at connectingthedollars.com

Amanda Vaught (17:00):

The blog post gets into some of the arguments around inflation and using cryptos as a hedge. And some of the other arguments around crypto that we didn't get into as much today. Mm-Hmm .

Emily Agosto (17:13):

Yeah. And it's like I said, a popular topic that we're keeping our eye on. So if you have any questions you wanna ask us directly, you can always email connectingthedollars@propel-fa.com. Okay.

Amanda Vaught (17:27):

That's great. Emily, great conversation today. Yeah,

Emily Agosto (17:30):

I think so. Well happy new year and we'll talk to you soon. Yeah.

Amanda Vaught (17:34):

Happy New Year

Emily Agosto (17:37):

For all links and resources mentioned today. Head over to connectingthedollars.com. Thank you for listening.

Amanda Vaught (17:44):

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast does not engage in rendering legal, financial, or other professional services.