During the past few weeks, several high-profile and well-respected voices in investment circles have made public statements disavowing any faith in Bitcoin’s continuing rise and warning investors about what they see as a bubble. Federal Reserve Chair Janet Yellen, during a statement on the Fed’s decision to raise interest rates this week, took a moment to clarify her position on Bitcoin and described the cryptocurrency as a “speculative asset” and an investment with limited material value.
The core message underlying these position statements is more-or-less clear: If you haven’t invested in Bitcoin yet, do so now at your own well-recognized risk.
But what about those who are already committed to the enterprise and aren’t sure what to do next? If you’re like many Bitcoin investors who bought a few fractions of a coin over the summer or during the past year or two, your current portfolio total may be more than you’re used to seeing from a single investment decision. You may be getting genuinely nervous, and if you have no idea what to do with this unrealized small fortune you’re holding, you’re not alone. Here are three things to keep in mind as you move forward into this uncharted territory.
Be careful of investing in other types of coin.
Many Bitcoin investors want to re-invest coin into other cryptocurrencies. In our practice, we have seen an explosion of both securities-based and product-based token offerings (also called ICOs or “initial coin offerings”) to both accredited and unaccredited investors. We have seen a significant amount of companies offering these ICOs with highly mixed compliance with securities rules. Be very careful about investing in other types of coin: in the explosion of ICOs, there are too many companies who are disregarding securities rules and not being honest about what their coin is doing, either by failing to disclose material points, or in outright misrepresentation. Diversifying your coin portfolio is not a bad idea in theory; but you need to be extremely cautious about the new types of coin that are being offered these days, and do extensive diligence on who is offering the coin and why.
Be prepared to get help with your taxes.
Your Bitcoin returns will be taxed as a capital asset, but you’ll have to handle your records yourself—Don’t expect a 1090 form in the mail as you would from a bank or investment firm. Keep track of every one of your purchases and sales, including the date and the price you paid. Use this quick, non-comprehensive overview to estimate your tax obligations, and get specific guidance from your tax advisor.
Revise your long term financial plan.
Maybe you made only a few hundred dollars with your bitcoin investment, or maybe your returns are life changing. We all have a different financial comfort zone, and we all have a different understanding of what feels normal. Every long-term investment plan varies according to the needs, goals and standards of the person behind the plan. If this amount of money feels significant to you, then it’s significant. And if it represents an alteration to your long term goals (like retirement) adjust those goals accordingly. You may also need to deal with the potential headaches and heartaches that might occur if you feel you’ve cashed out too early or too late. Whatever you do: don’t be greedy. Greed and bubbles don’t mix well, and usually the greedy end up being crushed when the bubble pops. Get help from a financial planner or investment manager if you aren’t sure how to proceed on your own. We can help with legal issues, but financial planning is for another expert advisor.