Tag: Cryptocurrency

Posted on

Cryptocurrency in 2022

It has been a very difficult year for cryptocurrency investors. Here, we will discuss the recent trend of cryptocurrency returns. Also, we will highlight the current cost of cryptocurrency mining, and share some thoughts on the future of this asset.

Cryptocurrency returns in 2022

Year-to-date returns of Bitcoin, Ethereum, and the first ETF that tracks bitcoin futures (ticker: BITO) appear below. Like the stock and bond markets, all three of these assets lost value in 2022. Also, in our previous post on the risks of cryptocurrencies, the volatility of all of these cryptocurrency assets was significantly higher than the long-term historical norm of 15-20% for the S&P 500.

Total returns for the Grayscale Bitcoin Trust (GBTC), the Grayscale Ethereum Trust (ETHE) and the first ETF linked to bitcoin futures BITO.
Total returns for the  Grayscale Bitcoin Trust  (GBTC), the Grayscale Ethereum Trust (ETHE), and the first ETF linked to bitcoin futures BITO.

Bitcoin miners

Like oil, natural gas, and precious metals, there is a cost to “mine” bitcoin. Economic theory for commodities suggests that, when demand is constant, rising prices should increase production, since even less efficient miners can operate profitably. However, as prices drop, less efficient producers will exit, and less production of a commodity will occur, thereby stabilizing prices. That may be occurring now, as the price to mine one bitcoin is in the $20,000 to $34,000 range. As of July 31, 2022, the price of one bitcoin was within this range, with a value of $23,819.

Production cost of bitcoin, the most popular cryptocurrency. Source: TradingView
Bitcoin production cost. Source: TradingView

The Future of Cryptocurrency

The future of cryptocurrency remains uncertain. However, few expect these new innovations in decentralized finance to go away. Instead, we may see longer-term price stabilization, as the investment in mining produces enough cryptocurrency to satisfy demand. Such price stabilization may not entice investors seeking outsize returns but could help cryptocurrency gain wider acceptance if its volatility can also be reduced.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs
Posted on

Bitcoin ETFs may arrive soon, but returns may surprise ETF investors

Investor interest in cryptocurrency and bitcoin remains high. This week, ETF investors may see the first futures-based bitcoin ETFs. Here, we discuss the introduction of bitcoin ETFs, and why they may not perform as ETF investors expect.

person putting bitcoin in a piggy bank
Photo by Alesia Kozik on Pexels.com

Set to debut this week and next week

According to this ETF.com article, October 18th could be the first effective date that two bitcoin ETFs are set to debut. And, another bitcoin ETF could become available a week later, on October 23rd, and a fourth potentially available on October 25th. But, its important to note that each of these ETFs depend on futures contracts for their bitcoin exposure. Therefore, none of them hold bitcoin to provide direct exposure to the spot market. Instead, the most direct exposure for investors seeking bitcoin remains the Grayscale Bitcoin Trust (GBTC), which typically trades at a premium. In fact, we wrote about the risks and taxation of GBTC earlier this year.

What can happen with futures-based ETFs?

Sadly, futures-based ETFs can often not match the corresponding price performance of the spot market. For example, ETF investors wishing exposure to West Texas Intermediate crude oil price changes could buy the United States Oil Fund ETF (ticker: USO) Unfortunately, a phenomenan called “contango” can occur when the price of the futures contract exceeds the expected future spot price. So, the fund loses money when it replaces expiring contracts with near-term future contracts. Consequently, over time, futures-based ETFs tend to underperform the spot price market.

“These kinds of vehicles are primarily meant to be used by active traders to hedge or short positions.  They are not meant as long-term buy and hold vehicles.”

source: CNBC.com.

A better way to track bitcoin in an ETF

Fortunately, there is some good news about bitcoin ETFs. Greyscale has indicated it may convert its current bitcoin fund into an ETF. If they do, this ETF’s investment returns wouldn’t be subject to contango, and won’t suffer from the return drag of futures-based bitcoin ETFs. However, the Securities and Exchange Commission (SEC) current commissioner has stated he prefers approving ETFs backed by bitcoin futures. So, ETF investors interested in bitcoin may wish to continue to wait or seek alternatives outside the ETF space.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

Posted on

Taxes on Cryptocurrencies

In our post last week, we showed how the risk of cryptocurrencies appears much higher than the risk of stocks and bonds. This week, we will discuss some of the taxes on cryptocurrencies, and how they differ from buying and selling an ETF.

various cryptocurrency on table
Photo by Roger Brown on Pexels.com

Taxing gains and losses

When trading an ETF in a taxable account (e.g. not an IRA or Roth IRA account), trades are generally subject to taxes much like that of a stock. So, gains that are realized after holding for less than a year are taxable as ordinary income. However, to reduce taxes owed on these gains, an investor can offset them with realized losses on other ETFs. Termed tax-loss harvesting, such an approach can have significant economic benefits. But, what if the investor wishes to buy these ETFs they just sold because they anticipate it to appreciate again?

Wash Sale Rules

Selling, then rebuying, an ETF within 30 days violates the Wash Sale Rule. Consequently, such a violation means that the loss on the ETF investment can not be claimed for tax reasons, effectively eliminating the opportunity to tax-loss harvest. But, based on experts cited in this recent CNBC article, wash sale rules do not apply to taxes on cryptocurrencies. The article does caution that some caveats do apply. It suggests that selling a cryptocurrency one day and buying it again the next could still enable tax-loss harvesting. Given the recent wild swings in cryptocurrency prices, and recent gains in some ETFs, investors may wish to consider this tax-loss harvesting approach.

Free and Premium Portfolios Now Available

Lastly, this post is a reminder that the latest free and premium optimal portfolios are now available for your review. So, please log in and see how the latest market conditions have affected these ETF portfolios. 

Note:  This post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
Posted on

Measuring cryptocurrency risk

Cryptocurrency risk is well known to be very high for many reasons. However, both individual and institutional investors continue to evaluate it as part of their investment portfolios. This post discusses recent cryptocurrency trends in a diversified portfolio and how the risks of this alternative investment compare to mainstream investments like stocks and bonds.

Volatility estimates

Volatility is one common way of assessing the risk of any investment. For the stock market, we provide a historical perspective, updated daily, to see how volatility changes over time for the stock market. But, how does this volatility compare to investments in cryptocurrency? The chart below shows a 3-month annualized volatility for the last several years of the stock market, measured with the ETF IVV, the bond market, measured by the ETF AGG, and the crypto market, measured by the Grayscale Bitcoin Trust  (GBTC). As this chart shows, bond volatility is the lowest, averaging between 3-4%. Stock volatility is higher, averaging between 15 – 20%. Cryptocurrency risk is about five times higher than stocks, with average volatility between 90-100%.

3-Month Annualized Volatility of the stock, bond, and cryptocurrency markets. Source: ETFMathGuy.com
3-Month annualized volatility of the stock, bond, and cryptocurrency markets. Source: ETFMathGuy.com

How much to allocate to cryptocurrency?

This recent WSJ article provided some guidance for individual investors interested in investing in cryptocurrency. While the answers to this question really depend on the individual’s risk tolerance, this article suggested between 1-2%. So, even if the value of the crypto investment hits $0, the investor limits their loss to this original investment amount. But, given the high levels of volatility, more frequent rebalancing may be prudent. Thus, if there is a substantial increase in the price of a crypto investment, the targeted 1-2% allocation would most likely require selling some of the crypto gains.

Unfortunately, selling short-term gains can be “expensive”, especially for those individual investors in a higher income tax bracket. In this case, the use of a Roth IRA may be the best approach. Why? An investor can realize Roth IRA gains tax-free if taken after age 59 1/2 from an account open for more than five years.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.