I’m not saying you should or shouldn’t buy the digital virtual currency, which is booming once again. I’m just saying, if you do decide to buy it, as an investment or a trade, do it in your IRA or some other tax-sheltered account. (A growing number of these let you own bitcoin).
That way you can ride the latest mania, maybe make a quick profit—and not have to pay any tax when you cash out.
The IRS treats bitcoin as “property,” meaning any gains you make outside of a sheltered account will count as ordinary income.
Bitcoin has risen 70% since the start of October and is nearly at record highs. It’s more than doubled in price in a year. Ah yes, the boom times are back. The bitcoin fanatics are reappearing after their three year hibernation. Cryptocurrency “experts” will soon be cropping up on cable TV, if they aren’t already.
Traders riding this high risk bandwagon are making out like bandits…for now, anyway.
And then there’s Thanksgiving.
It was Thanksgiving three years ago that sent the cryptocurrency mania into orbit. Relatives who’d made money from bitcoin passed on the news to other relatives over the turkey, and explained what bitcoin was and how it worked. The other relatives went home and joined in. Bingo.
Bitcoin tripled in about a month.
Could it happen again this time around? Sure. Why not? Nobody knows.
You could make a quick profit. There again, you could make a quick loss.
But if you want to play and keep down your risks, just play with the house’s money.
It’s an old Wall Street trader’s trick, explained to me by an investment analyst years ago early in the dot-com bubble.
Start by buying, say, $1,000 worth of bitcoin (or $100, or $100,000, or whatever suits your budget). If it rises, and you start to show a profit, buy a bit more. Each time it rises, and your profit grows, buy a bit more…and a bit more…
But do not buy if it starts falling. And cash out if it falls to a trigger point you set in advance, such as 20% from the peak price. Be willing to take a loss and walk away.
Ride the train while it keeps going. Just remember to get off before it hurtles over the cliff.
The disastrous end of the last crypto bubble was signaled quite clearly in advance: A front-page article in the New York Times Style section cheering on the bubble, entitled, “Everyone Is Getting Hilariously Rich And You’re Not.”
That was the peak of the market. Bitcoin then plunged 80%. Other cryptocurrencies collapsed even more.
You can set your watch by these things.
Bitcoin has been around for over a decade now. Technologists and fanboys say that the software and design behind it is quite brilliant.
But of course that has nothing to do with investing.
Bitcoin is a largely useless asset. I am still waiting for a single bitcoin fan or expert to explain to me what bitcoins are really useful for, other than money laundering. I already have my pick of other, legal currencies and gold. It’s quick and easy these days to transfer money online.
Some suggest bitcoin could provide cheap banking services for the poor and “unbanked” around the world. Goat herders in Turkmenistan will keep their money in cryptocurrencies and manage it on their smartphones.
I will believe it when I see it.
I asked a crypto fanboy the other day what the legal utility of bitcoin was. “Attestation,” he replied. I asked him to explain what he meant, and he sent me a link to an online dictionary.
Attestation: “A proof of concept.” OK. Big deal. Why would that make it valuable?
Admittedly, cryptocurrencies are excellent for laundering money. If I was in the business of selling illegal drugs, evading taxes, supporting terrorists, or blackmailing local authorities and hospitals with computer viruses, I would love this stuff.
Meanwhile, remember the bitcoin market is effectively a Ponzi scheme. Old investors can get paid out only with money from new investors. No, it’s not the same with stocks and bonds. Bitcoins generate no earnings of their own. They pay no coupons or dividends.
So you may buy bitcoin at $18,000 hoping to sell it to someone else at, say, $20,000. Why would that person buy it from you? They’d be hoping to sell it to someone else for, say, $25,000. And why would that person pay $25,000? They’d be hoping…
You get the picture.
Bitcoin, and the blockchain technology behind it, is apparently fabulous technology. But so what? Without a compelling application it’s just a very clever bit of tech, like the old joke about the inventor who comes up with an ingenious kitchen appliance that can scramble an egg inside the shell. Yes, it’s brilliant. But why do I want it?
If I weren’t writing about bitcoin, I’d probably be trading it. Never let a bubble go to waste. So maybe you can make money (real money, measured in U.S. dollars or the equivalent). It’s high risk. But good luck.
Just remember: Save yourself taxes and headaches by doing it in a tax-sheltered account, like an IRA. Oh, and watch out for the end of the track.