Ethical considerations of cryptocurrency
With the news from Tesla and Morgan Stanley investing in Bitcoin, driving its price 70% higher so far this year, investors are wondering if this is something that can’t be ignored in an investment portfolio. Setting aside that worthy analysis remains the question of its ethical implications and realities of these investments. Crypto investors, some of whom are self-described socially conscious, may be practicing a bit of hypocrisy if not taking into account its ethical implications.
First, it’s prudent to understand why Tesla and Morgan Stanley allocated assets toward Bitcoin if anything other than to benefit from its rising popularity. Bitcoin is not a currency. Even though Tesla now accepts coin payments and many other places accept these payments, it’s necessary to point out that once the payment is received it’s usually converted into dollars, which is necessary for book-keeping and financial reporting. This is no different from selling your own Bitcoin holdings, buying dollars, and then completing your transaction.
Crypto is certainly a force not to be ignored. Its ability to secure transactions and generate wealth has gained the attention of the mass media over and over again. With its 70% decline from June ‘19 to May ‘20, Bitcoin was largely ignored. It has only lately recovered from the doldrums and is now a rising force in the risk-on community of investors.
Crypto secures transactions by using computers all over the world. Every participating computer will track and record that same transaction, giving a sense of security that it was a legitimate transaction. With all the computers making the same calculation on billions of similar transactions, it uses so much energy, this alone caused a noticeable increase in CO2 emissions in 2018.^1
Facebook’s attempt last year to create Libra as a potential replacement for the US dollar sets an ethically perilous precedent. The US wields considerable strength over the global banking community because most commodities, such as oil, are traded in dollars and also because global banks often must adhere to FATCA - a tax reporting requirement by the US on the international banking system. When authoritarian regimes commit human rights violations, military incursions, and the list goes on, the U.S. can subject the regime to sanctions. This is only possible because the banking community must transact through the US in most cases. To avoid this predicament, Venezuela has decided to move into cryptocurrency since 2017, among the other regimes that are hiding out there in order to avoid being subjected to US interference.^2
A currency is a placeholder of wealth that allows for transactions. Most crypto investors keep their holdings and may buy more. Its high volatility makes it less like a currency and more like a commodity, with a few “whales” as the primary owners and major price influencers. Only 1,000 people owned 40% of Bitcoin in 2017 with even fewer at the very top. ^3
As an investor, you should know your risk tolerance, tax situation, and time horizon. Crypto is a speculative, tax-heavy investment largely supported by cheap debt (low-interest rates) and a desire by small countries to keep capital outside the US banking system. With just a little interest from a corrupt government, the price of crypto will likely go much higher. You should decide where you want to leave your investment footprint.
At Eureka Wealth Management, I help my clients diversify their investments within an ethical and tax-aware spectrum of choices and help critically think through new and exciting investments, such as crypto. I also do financial planning and tax/estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.