Over the last few years, the world has seen a crippling pandemic, a war in Europe, record high inflation, supply chain disruptions, political chaos, uncertainty, skyrocketing debt, and several nations de-dollarizing their economies, and the manifestation of countless crises. With so much happening, many people struggle in times like these. People often ask my advice on where they should put their money.
Inevitably, the conversation detours from sound portfolio allocation strategies, like value and dividend stocks, bonds, real estate, and precious metals, to something I call the “lottery ticket dance.” More times than I can count, I hear a version of “So, what do you think about cryptocurrencies?” They are looking at cryptocurrencies like a lottery ticket and are hoping I can give the winning numbers. Usually, the question means the person is stressed and needs to find a way to make money quickly.
I studied finance in college but am not a certified financial advisor or planner. I do not give recommendations. However, I do give education and my opinion if people want it. No one should construe anything I say as investment advice, but feel free to label it my opinion. No one should invest in cryptocurrencies if they cannot afford to lose every penny invested. The short of cryptocurrencies is that they are highly volatile and will eventually become illegal, making them worthless. Bill Slack wrote an excellent article detailing some of these thoughts.
What is the difference between currency and money?
Money and currency are closely related, but there are important distinctions. Money is a broader term for an intangible value system, making exchange possible. Currency is the tangible form of money used in exchanges. If the market called them digital assets instead of cryptocurrencies, there would be little controversy. The government would utilize the capital gains tax codes to regulate the market. Capital gains are how the government taxes cryptocurrencies now. However, calling them cryptocurrencies presents a problem needing addressing. If they are currencies, they are tangible money and can settle transactions, which begs the question, which money do they represent?
Why will cryptocurrencies become illegal?
Regulating the currency is the most critical function of a government. Tax policy and collection become extremely difficult if a government does not control the currency. Without regulating commerce and taxes, all other government functions become a moot point. What purpose do grandiose legislation and massive spending projects serve without funding? That is why cryptocurrencies are already illegal in eight countries, including China, and heavily regulated and excessively taxed in 43 other countries.
It is the regulation of currency that enables a nation the ability to exist. The Founding Fathers knew this well and included this idea in the Constitution. Article I, Section 8, Clause 5 of the U.S. Constitution reads, “The Congress shall have power … to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures. Power hates competition, so the most logical action will be making cryptocurrencies illegal.
Why do I bring it up?
About a year ago, I was in a discussion about cryptocurrencies and central bank digital currencies (CBDC) . I shared my opinion that cryptocurrencies would become illegal. My client asked me why the government permits them now. The reason connects the government’s rapidly accelerating efforts to produce a CBDC and the wild west of private cryptocurrencies.
Private cryptocurrencies serve a purpose, but that purpose will be short-lived. Americans are ruggedly individualistic and need coercion before giving more power to the government. (You know, never let a crisis go to waste?) Also, the mass adoption of a CBDC takes time. I told my client that private cryptocurrencies were a placeholder for training people about digital payments. However, as the government gets closer to releasing a CBDC, we will hear about rampant cryptocurrency crime and corruption. The media will get outraged, calling for regulation, and the people will demand the government act. The initial government reaction will be regulation, and more bad things will happen, making cryptocurrencies illegal. Have you noticed all the cryptocurrency headlines lately as the Fed tests the CBDC accounting software ?
Consider these three examples within the last month. Bitfinex is refusing to return recovered stolen cryptocurrencies worth billions to their customers. The DEA says a drug cartel laundered millions of dollars through crypto exchange Binance. FTX and its crew of clowns swindled billions from investors. The investigator of Enron, John Ray III, said “Never in my career have I seen such a failure of corporate controls and such a complete absence of trustworthy financial information as occurred here (FTX). From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in a small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented. There isn't a more definitive statement about FTX than the guy who cleaned up Enron saying it is the craziest thing he ever saw. Selah.
The list of scandals is much longer than the examples given. Still, two of these examples cost investors billions, and one is blatant money laundering. Embezzlement, money laundering, and fraud are serious scandals. The CNBC headline from December 16 says it all, "Treasury’s financial stability watchdog says fraud is rampant in crypto markets.
The media is reporting many cryptocurrency stories weekly. Regulators expect more scandals to develop and openly admit it. CNBC says only 8% of Americans trust cryptocurrencies.
We have the scandals. We have the global media barking about immediate regulation. What's next, and how long until we get there?
The head Governor of the Indian Central Bank, Shaktikanta Das, thinks regulation is a waste of time. Instead, he believes the world should ban all cryptocurrencies to avoid the next financial crisis. It is probably just a coincidence in October the Indian Central Bank announced it was about to begin tests for the digital Rupee, and two months later is calling for all private cryptocurrencies to be banned. In early 2022, the Central Bank of India announced their CBDC was part of the 2023 budget.
Why is India calling for cryptocurrencies to be banned?
Reread the prediction. “As the government gets closer to releasing a CBDC, we will hear about rampant cryptocurrency crime and corruption. The media will get outraged, calling for regulation, and the people will demand the government act. The initial government reaction will be regulation, and more bad things will happen, making cryptocurrencies illegal.” Is it surprising that India, like China, is much closer to a CBDC than the U.S. and is calling for a total ban?
There is an uncomfortable saying in real estate. “If you can’t figure out who the sucker in the transaction is, it’s you.” The axiom applies to the crypto space as well. There is the promise of life-changing riches in a short period. Cryptocurrencies are an unregulated, hard-to-tax market with 1,000s of coins to choose from. It sounds a little too much like Pleasure Island in Pinocchio, where the children turn into asses.
It may be a coincidence that my prediction was eerily accurate. Even a broken clock is right twice a day, and even a blind squirrel finds a nut from time to time. However, if my assessment is correct, you should protect yourself now. The Indian Central Bank probably revealed what is next because it looks like it is by design. Cryptocurrencies will ultimately collapse the market. The collapse will be massive, and the justification to ban them and people will beg for stability. The Fed will usher in a CBDC shortly after. Have you ever heard the phrase, “evil prevails when good people do nothing?” The same is true for bad things in your portfolio. Are you going to do nothing?
Protecting yourself is not hard, but it does require a phone call. Don't wait.
Protect yourself today.