Cryptocurrency Experiment – the Inevitable Crash, 6 Month Update
Well, here we are at the six month mark of this cryptocurrency experiment. Aside from half a year being a nice waypoint of time, there is quite a bit happening in the crypto world. First and foremost, it’s been an absolutely wild ride over the last two months; my portfolio boomed to insane levels, then we had the long-expected and much-discussed crash…which is still happening. The second big thing is that it’s time to start figuring out the tax situation on this portfolio. So, we’ll unpack all of that, after the “previous article” links.
Previous articles on this cryptocurrency experiment:
The New Year Surge
When we last examined this cryptocurrency experiment, things were looking pretty great. My balance across 35 coins had increased to five times the original investment! Truly, it was insanity. An example of this insanity; quite a few coins (XSPEC, Flashcoin, Myriad, Verge, Reddcoin, Monacoin, Einsteinium) had increased over 1000% since I purchased them. I kept wondering, “how long is this going to continue? It can’t just keep going…can it?” I felt certain it would crash at some point, but honestly so much of the cryptocurrency market seems to defy logic, so who could say for certain. Regardless, I began to wonder what this crazy experiment was going to look like by next year.
This was around the high point, shortly afterward the market began a several week long collapse. A note on the “USD Change” graphs: I’m taking a different approach on this post. Unfortunately, I purchased varied amounts of each coin initially, which doesn’t give a fair estimate of growth. It’s deceptive, because the ones I spent more cash on seem like they’re better at first glance. So, this time, I’m listing the coins I have and their changes, but I’m pretending I had initially purchased $10 worth of each. In other words, it should be more fair and helpful to show what would have been the best investment, rather than my scattershot buys. This will actually look similar to percentage value graphs, but it’s a bit easier to imagine in a practical way.
The Current Market Crash
As with most surges and drops in the cryptocurrency market, it often seems like Bitcoin is the leader. As Bitcoin falls, the altcoins follow soon after. That has been the way with this crash, too. As I was writing this, Bitcoin was under $8500 from almost reaching $20,000 towards the end of 2017. Fortunately, I don’t have much in Bitcoin; this was an altcoin experiment from the start, and some of them haven’t dropped quite as significantly. Regardless, this is a major decrease across the board. I don’t really know what has caused it; this market is heavily affected by news (positive or negative), so that could be significant. I’ve read that a large January drop is common every year, but this one does seem larger than others…but, maybe that’s just because I’m riding the wave this time.
Although it’s alarming to watch so much value get wiped out, it is also important to keep things in perspective. Even with what feels like a catastrophic drop, overall I’m still up around double my initial buy in. For only a six month period, a two-fold increase in investment is still pretty amazing. As I’ve said before, this experiment is for a long term hold of several years, so I haven’t considered selling. And, as Warren Buffet said, “be fearful when others are greedy, and greedy when others are fearful.” If someone really believed in cryptocurrency, now would be the time to buy, not to sell out of fear. When you sell during a crash, all you’re doing is locking in your losses. I’m not buying anymore, because I’m at my risk limit. But more aggressive investors probably will.
As I said, this current crash may not be over. My portfolio is actually the lowest it’s been in a couple months. The big question now is, where’s the bottom? It’s always a possibility that most of the value, or even all of it, could be wiped out. This is a risky market, and the advice “don’t invest any more than you’re willing to completely lose” definitely applies to cryptocurrency. In fact, I’d say that’s the number one rule for such an unregulated market. I suppose we’ll see what the bottom is in this crash, and if a strong recovery is in order, over the next couple of months. So, here is where I stand with this experiment:
So, why examine a crashing cryptocurrency market? What can be gained from watching these coins in a free-fall? In a growing market, like the one we’ve watched for most of late 2017, I think these articles can be helpful to share coins that have boomed. Readers can gain insight into what has already had huge growth, perhaps find new ones that haven’t yet but share similar characteristics. Now, in a crashing market, we can perhaps see which coins/tokens have staying power. During a selling-spree, which coins do investors seem to hold onto?
From what I can tell, many of the “flavor of the month” coins did not fair as well during the crash. Altcoins that have been hyped as the next big thing seemed to take heavy losses. These coins may be bargain purchases now (if they recover), but alternatively the crash may have revealed these are not strong/stable buys. There are a few newer coins/tokens that were a bit more stable, or at least still looked to be strong growers in the longer term. Altcoins like Ripple, XSPEC, Verge, and Stellar Lumens jump out at me, and looked like good purchases in hindsight. Ethereum has also been impressively sturdy in the downturn.
The Taxman Cometh
Another topic I wanted to cover, now that we’ve discussed this crash, is tax season. It’s coming up again, and Uncle Sam wants his due. If you’ve been following the news, the IRS is becoming more interested in the cryptocurrency world. Although this is my first year of being involved, I’m sure many have been doing this for years. If you have been enjoying years of growth and haven’t paid taxes yet on realized gains, I would encourage you to consider it. I think governments are going to only get more interested in their cut, and tax collecting entities are usually pretty tenacious. Just my two cents on the matter.
Having said that, I’m sure it’s no surprise that I’m reporting everything from this experiment on my return. Fortunately, I’ve kept decent spreadsheets, and my understanding is that most exchanges will let you download all of your transaction details for tax time. There is some guidance (TurboTax, IRS) out there already, which helps. It seems like the bottom line (in the U.S.) is that coins held as capital assets are taxed as property. If you hold the currency as an investment, then any gain/loss from the sale or exchange of the asset is taxed as a capital gain/loss. That’s a shame, because it seems like “exchange” includes transactions from USD to Bitcoin, then from Bitcoin to altcoins…double taxation, I guess? I’m no accountant though, so I may have to get some professional advice this year.
Until Next Time
The experiment continues! Hopefully, these things won’t go down to zero, but it won’t be the end of the world if they do. As long as they have some value, I’ll keep watching the fun. I probably won’t provide any more updates for a few months, unless something crazy happens. Feel free to comment, if anyone who happens to make it through this brutal wall of text has questions.