Is Crypto the Next Bubble?

Modern decentralized forms of investment are gaining favor, particularly with younger people, but are they viable for the future?
Illustrations by Brian Britigan
Illustrations by Brian Britigan

Ask a baby boomer about cryptocurrency and the response may be a blank stare or a look of confusion. A younger person, on the other hand, will likely say it’s the wave of the future. Both responses are justified.

Cryptocurrency is a digital currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies exist on decentralized networks based on blockchain technology — generally a distributed ledger enforced by a diverse network of computers. Blockchain safeguards data or any material by creating an immutable record of the transactions included in the blocks.

“Every crypto resides on blockchain due to the ‘proof’ algorithm,” says Phil Abraham, a cybersecurity and technology expert from Northville and chief technology officer for DragonChain, America’s blockchain. “The algorithm is proof there’s a transaction, which is represented by millions of links — meaning modification or changing a transaction is impossible.”

A defining feature of cryptocurrencies is that they’re generally not issued by any central authority, rendering them theoretically immune to government interference, manipulation, or regulation.

There are two schools of thought regarding cryptocurrency: pro and con. A proselytizer’s basic premise is that the U.S. government, the U.S. Treasury, and the Federal Reserve together cannot be trusted to maintain the reserve currency status of the dollar because their policies will lead to high inflation that will debase the value of the dollar.

The belief of the naysayers is that a digital coin has no tangible value or utility outside the digital asset ecosystem, nor does it have any intrinsic value, nor is it an investable class asset. In other words, it’s a bubble that will eventually burst.

The most popular cryptocurrencies are Bitcoin and Ether, but there are many other offerings, which leads to some of the confusion. In addition, as an investment, the value of cryptocurrency isn’t necessarily related to the performance of a company or a product.

“I wouldn’t recommend someone close to retirement putting everything they have into a crypto asset,” says Ryan Firth, founder and president of Mercer Street, a financial planning and advisory firm in Houston. “I would tell them to start slow, dabble in it. See where it goes. The risk is they could put so much into it, and it goes to zero. As you know, prices fluctuate quite a bit.”

That might be an understatement. On Jan. 21, Bitcoin was trading at $36,456 — a 10.3-percent drop from the previous day ($40,646), due to fears of a Russian attack on Ukraine. Bitcoin was at an all-time high, at $67,582, just three months earlier.

One situation that’s caused cryptocurrency values to fluctuate is the expectation that the Federal Reserve will raise interest rates this year. Another factor that can drive movement one way or the other is news stories about increased government regulation of digital currency.

“Cryptocurrency is a volatile asset,” says Charlotte Principato, a financial services analyst with data intelligence firm Morning Consult. “Older generations tend to be more risk-averse about their portfolios, making cryptocurrency an unattractive investment vehicle. For example, 25 percent of millennials are willing to take above average risk with their investments, compared to 16 percent of baby boomers.”

Carol Alexander, a professor of finance at Sussex University in the U.K., said in a report on that she expects Bitcoin to “tank to as low as $10,000 in 2022, virtually wiping out all of its gains in the past year and a half.

“If I were an investor now, I would think about coming out of Bitcoin soon because its price will probably crash,” Alexander said. Her bearish call, according to the article, hinges on the idea that Bitcoin “has no fundamental value” and serves as more of a “toy” than an investment.

Alexander warned of history repeating itself. In 2018, Bitcoin tumbled close to $3,000 after climbing to a high of nearly $20,000 a few months earlier. The cryptocurrency’s backers often say that things are different this time, as more institutional investors are jumping into the market.

Chicago-based writer Sohale Andrus Mortazavi, in Jacobin magazine, calls cryptocurrency an out-and-out scam. “All cryptocurrency and the industry as a whole are built atop market manipulation, without which they could not exist at scale,” Mortazavi writes.

Others — like Gemini Trust Co., a cryptocurrency exchange based in New York, and Morning Consult, which has offices in Washington, D.C., New York, Chicago, and San Francisco — expect cryptocurrency to continue to grow over time.

Despite the potential for confusion and the instability of its value, institutional investors stepped forward in 2020 in public support of cryptocurrency. Companies like PayPal, MicroStrategy, and Twitter put forward plans to either support crypto payments or openly invest in it themselves by adding it to their respective balance sheets, according to Gemini’s 2021 State of the U.S. Crypto report.

Morning Consult, in its 2022 The State of Consumer Banking and Payments report, saw added growth: “Look for continued adoption of cryptocurrency and related brands in the next year as younger generations lead the charge. Cryptocurrency has proved to be more than a passing fad. It will continue to gain consumers’ attention and share of wallet in 2022.”

There’s no question that a youth movement is driving cryptocurrency. According to the Gemini report, 74 percent of investors are men, 74 percent are between 25-44 years old, and 71 percent are white.

“Cryptocurrency is first and foremost a technology, and a relatively new one,” Principato explains. “Younger generations are more likely to adopt new financial and digital technologies, so they’re more likely to be interested in cryptocurrency.”

She says a survey her company did on cryptocurrency shows that more than half of the millennials who participated (57 percent) say they’re generally the first to try a technology product, while only 13 percent of baby boomers say the same. Baby boomers also are less likely to be looking for new ways to better manage their money compared to millennials (52 percent vs. 80 percent, respectively).

“Older generations are less likely to understand or trust cryptocurrency,” Principato adds. “Two-thirds of baby boomers say they don’t understand cryptocurrency at all, compared to 36 percent of millennials. As a result, only 18 percent of baby boomers trust cryptocurrency, compared to 49 percent of millennials.”

In addition to attracting young people, cryptocurrency also is a lure for the famous.

University of Michigan quarterback Cade McNamara, Green Bay Packers signal caller Aaron Rodgers, Los Angeles Rams wide receiver Odell Beckham Jr., Detroit Pistons guard Cade Cunningham, NASCAR driver Landon Cassill, Snoop Dog, Ashton Kutcher, Gwyneth Paltrow, and Mel B from the Spice Girls are among the notables with connections to cryptocurrency.

Some celebrities made news by allegedly publicizing their investments, then quietly selling off their crypto when the value increased. Kim Kardashian, former NBA star Paul Pierce, and boxer Floyd Meriweather have been accused of a “pump and dump” scheme related to EthereumMax.

Adding to the market are pseudo celebrities and causes that try to bring attention to a cryptocurrency via a publicity stunt.

One such example is the Beetcoin, named after a character on “The Howard Stern Show” on SiriusXM satellite radio. Another is the LGBCoin, named after the “Let’s Go Brandon” euphemism for an anti-Joe Biden saying that became popular after it was said by a reporter to explain a chant heard at a NASCAR race.

According to The Wall Street Journal, regulators in the Biden administration are working to clarify rules for a market that roughly tripled in value in 2021 to more than $2 trillion, drawing in millions of American investors and increasing concerns about financial stability.

“Right now, there’s no 1099 (IRS form) reporting for it,” Firth says. “Congress did pass a law requiring these service providers to report transactions to the government, so they can go after people who aren’t reporting gains on their crypto holdings. It’s ripe for tax evasion if you’re doing things yourself and not using an exchange.”

Then there’s the question of whether cryptocurrency can be legal tender now or a future replacement for fiat currency, which is government-issued money that’s not backed by a commodity such as gold.

“I don’t foresee a lot of people using something like Bitcoin to buy something if they think it’s going to increase in value over time,” Firth says. “But there are more merchants who are accepting crypto.”

The Sacramento Kings and Dallas Mavericks of the NBA and the Oakland Athletics Major League Baseball team, however, have joined a growing number of companies accepting cryptocurrency as payment for products.

Those who do accept crypto may need some sort of converter system so it can go into their books as U.S. dollars. Otherwise, if the crypto gains in value, the merchant may have an unrealized gain to claim on their taxes.

“The issue is that it makes for some tricky accounting,” Firth explains. “It makes things a little bit more complicated if merchants save crypto funds as an investment and don’t convert them to dollars right away.”

Pennsylvania business software provider Skynova recently collected data noting which companies and cities are more open to accepting crypto payments, with the help of sources like CoinMap, a company that tracks were Bitcoin can be bought and sold (even at certain ATMs) and used for purchases. Skynova determined the most Bitcoin-friendly cities (Los Angeles, Chicago, Boston, Houston, Dallas, and Tampa) based on how business owners are planning to approach cryptocurrency in the future.

Skynova’s key takeaways:

  • 32 percent of small business owners and top-level executives said their business currently accepts cryptocurrencies.
  • Bitcoin, Bitcoin Cash, and Ether were the most commonly accepted cryptocurrencies. Almost half of those business owners and top-level executives who don’t accept cryptocurrencies don’t plan to do so in the future.
  • One out of four small business owners and top-level executives who don’t accept cryptocurrencies would like to do so, but their companies don’t have the knowledge on how to do it.
  • The business owners Skynova talked with who already were accepting cryptocurrency for payments say they believe it’s the currency of the future (49 percent), it appeals to younger generations (44 percent), and it attracts new customers (43 percent).

Many Skynova survey participants said that once PayPal enabled online vendors to accept Bitcoin in 2014, the decision to go crypto was cemented. Fifty-nine percent agreed that major companies like PayPal green-lighting crypto was their primary influence. Half were also influenced by players like Tesla getting in on the crypto game. Most often, businesses accepted Bitcoin (58 percent), Bitcoin Cash (36 percent), or Ether (35 percent), although some ventured down even more alternative lanes.

Spanning the globe, using crypto for international transactions could be a messy business, as some countries have banned it. As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. For the rest of the planet, cryptocurrency regulations vary by jurisdiction.

Cryptocurrencies are legal in the European Union. In Japan, Bitcoin is legal property. Like Japan, the U.S. can treat cryptocurrencies as a financial asset or property. On May 20, 2021, the U.S. Department of the Treasury announced a proposal that would require taxpayers to report any cryptocurrency transaction of $10,000 and above (since signed into law). How proceeds would be taxed — as capital gains or ordinary income — may depend on how long the taxpayer holds the cryptocurrency.

Meanwhile, China has banned cryptocurrency exchanges and the mining of crypto, or the process by which new Bitcoins are entered into “circulation.” It’s also the way the network confirms new transactions and is a critical component of the blockchain ledger’s maintenance and development.

Mining is performed using sophisticated hardware that solves a complex computational math problem. The first computer operator to find the solution to the problem receives Bitcoin, and the process begins again.

Closer to home there’s a Bitcoin mining operation, BitNile, in Dowagiac on the west side of Michigan, that runs a 30,000-square-foot high-density data center that claims to house energy-efficient miners. More than 94 percent of the power in the facility, the company says, comes from non-coal sources. It’s part of Las Vegas-based Alliance Cloud Services’ 617,000-square-foot cloud data center in Dowagiac. 

Perhaps more worrisome than international regulations are cyber criminals. The dollar amount collected through cryptocurrency-based crime hit a record high in 2021, as the volume of cryptocurrency transactions overall grew into tens of trillions of dollars, according to a report from blockchain data platform Chainalysis Inc.

Overall, the volume of cryptocurrency transactions increased to $15.8 trillion in 2021, up 567 percent from 2020, an indication that trading of digital assets is becoming increasingly mainstream. Illicit transactions totaled $14 billion last year, up 79 percent from $7.8 billion in 2020.

Chainalysis warns that the rise of DeFi (decentralized finance), a term for financial services offered on public blockchains, is a particularly menacing threat to the sector. Out of the total of about $3.2 billion in cryptocurrency stolen in 2021, 72 percent was taken from DeFi protocols, according to Chainalysis. DeFi also was an increasingly popular way of money laundering, according to Chainalysis. The use of DeFi as a way to launder money increased 1,964 percent between 2020 and 2021, according to the company.

With the growth of cryptocurrency comes an increase in the number of people profiting from it, complemented by large marketing campaigns that seek to create a safe, mainstream sheen to the virtual marketplace.

The Wall Street Journal reports that Coinbase CEO Brian Armstrong recently purchased a $133 million estate in Los Angeles, one of the priciest single-family home sales ever completed in the L.A. area, while Singapore-based cryptocurrency platform ran its first Super Bowl commercial in February in its attempt to become a household name. And that was after paying $700 million for a 20-year deal giving it naming rights on the Staples Center in L.A.

While cryptocurrency is growing in popularity, is it destined to replace government-backed money? Probably not, but the Federal Reserve took a serious look at the prospect of minting a central bank digital currency (CBDC), sort of a hybrid crypto-fiat currency. A report issued last year outlined potential benefits and drawbacks of what could be a “highly significant innovation in American money,” but stopped short of taking a position on its implementation without the help of lawmakers, according to Forbes.

In its 40-page report, the Fed said a CBDC, which combines the efficiency of cryptocurrency transactions with the safeguards of a central bank-backed asset, could “fundamentally change” the structure of the nation’s financial system by altering the roles of the central bank and the private sector.

The report, authored by the Fed’s seven-member board of governors, states a widely available CBDC would serve as a “near-perfect” substitute for commercial bank money, so much that its implementation could reduce the amount of deposits in the banking industry — something cash banks rely on to fund loans.

It was reported by Coindesk, via a Freedom of Information Act request, that Jared Kushner, former President Donald Trump’s son-in-law, who acted as a senior adviser during Trump’s time in the White House, was interested enough in a national cryptocurrency that he emailed then-U.S. Treasury Secretary Steven Mnuchin about the idea. Kushner suggested it could be a way to cut down on waste, fraud, and transaction costs when paying out entitlements. The emails don’t show whether Mnuchin ever responded.

The former president doesn’t appear to be a proponent of cryptocurrency. “That (crypto) could be an explosion someday, the likes of which we’ve never seen,” he’s reported as saying. “It will make the big tech explosion look like baby stuff. I think it’s a very dangerous thing. I never loved it (crypto) because I like to have the dollar. I think the currency should be the dollar, so I was never a big fan, but it’s building up bigger and bigger and nobody’s doing anything about it. I want a currency called the dollar; I don’t want to have all of these others.”

Big questions remain. First, is cryptocurrency destined to become the next bubble that explodes, as the former president suggests?

“That’s a valid concern,” says Firth, of the Houston financial planning firm Mercer Street. “I think there are a lot of (crypto) projects out there that have no merit and won’t lead to anything. But there are those projects that could do really well. It’s more mature now, but it’s still kind of the early days. There are going to be some people who will lose their shirts on this, but overall I think Bitcoin is here to stay. I think Etherium has shown that it has staying power and will build into something bigger over time. It could be in a few years’ time that none of these projects pan out, and there’s always that risk of losing invested principal.”

Second, will cryptocurrency ever replace government-backed money?

“Thirty-one percent of adults believe that cryptocurrency is currently or will soon be a practical alternative to the U.S. dollar,” says Principato, of Morning Consult. “However, 25 percent of U.S. adults disagree. Forty-four percent of adults don’t have an opinion.”

Although the future of cryptocurrency is uncertain due to its wild fluctuations and pending regulatory questions, the fact is, as Morning Consult reports, cryptocurrency is now mainstream.

All About Crypocurrency

What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology — a distributed ledger enforced by a diverse network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference, regulation, or manipulation.

What Is Bitcoin Mining?
Bitcoin mining is the process by which new Bitcoins are entered into circulation; it is also the way that new transactions are confirmed by the network and a critical component of the maintenance and development of the blockchain ledger. “Mining” is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer user to find the solution to the problem is awarded Bitcoin and the process begins again. Cryptocurrency mining is painstaking, costly, and only sporadically rewarding.

What is Blockchain?
Blockchain is a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node, or a computer maintaining a copy of the ledger.

How Do You Buy Cryptocurrency?
Step One: Choose a crypto trading service or venue. Cryptocurrency exchanges are the most convenient option since they offer a breadth of features and more digital funds for trading as compared to other places.

Step Two: Connect your exchange to a payment option. The process is largely the same as setting up a typical brokerage account.

Step Three: Place an order.

Step Four: Safe storage. Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Having your crypto outside of the exchange and in your personal wallet ensures that only you have control over the private key to your funds. It also gives you the ability to store funds away from an exchange and avoid the risk of your exchange getting hacked and losing your funds. Hot wallets are wallets that run on internet-connected devices like computers, phones, or tablets. This can create vulnerability because these wallets generate the private keys to your coins on these internet-connected devices.

Cold wallets are not connected to the internet and therefore have a far lesser risk of being compromised. Cold wallets are the most secure way to store your Bitcoin or other cryptocurrencies. But they require more technical knowledge for set up.

Source: Investopedia

Cryptocurrency Among Sports and Celebrities

Sacramento Kings NBA Team
The Sacramento Kings’ claim to being one of the most cryptocurrency-forward teams in professional sports was fulfilled in 2014 when it became the first team to accept Bitcoin.

Dallas Mavericks NBA Team
The Dallas Mavericks started to accept Bitcoin as payment for game tickets and merchandise via BitPay in 2019, reports Bitcoin Magazine.

Oakland Athletics MLB Team
The team announced in March 2021 that it will accept Bitcoin as a payment for full-season suites, at a price of one Bitcoin per suite.

Cade McNamara — University of Michigan Quarterback
University of Michigan quarterback Cade McNamara signed a name, image, and likeness (NIL) endorsement deal with cryptocurrency company More Management.

Aaron Rodgers — Green Bay Packers Quarterback
On Nov. 21, 2021, Aaron Rodgers posted a tweet explaining that he had partnered with Square’s CashApp to convert an undisclosed portion of his 2021 salary to Bitcoin.

Russell Okung — Carolina Panthers Offensive Lineman
On Dec. 29, 2020, Bleacher Report announced that the Carolina Panthers will pay half of Russell Okung’s $13 million salary in Bitcoin.

Odell Beckham Jr. — Los Angeles Rams Wide Receiver
On Nov. 22, 2021, L.A. Rams wide receiver Odell Beckham Jr. tweeted that he would be partnering with CashApp to receive his new full salary in Bitcoin.

Trevor Lawrence — Jacksonville Jaguars Quarterback
USA Today reported in April 2021 that Trevor Lawrence would place part of his signing bonus in cryptocurrency.

Saquon Barkley — New York Giants Running Back
New York Giants running back Saquon Barkley in July 2021 announced that he will be paid 100 percent in Bitcoin for all future endorsement deals.

Cade Cunningham — Detroit Pistons Guard
Cade Cunningham, the Detroit Pistons’ No. 1 overall draft pick, signed a deal with BlockFi, a cryptocurrency platform, according to Forbes. Cunningham will get his signing bonus and part of his four-year, $46.5-million contract directly in Bitcoin, according to the report.

Elon Musk
Retail Insider reports that in February 2021, Elon Musk’s company, Tesla, purchased Bitcoin for $1.5 billion. According to Bitcoin Treasuries, the unrealized profit on Tesla’s investment stands at 75 percent — or more than $1 billion, given the current value of the first cryptocurrency.

Jack Dorsey
Jack Dorsey, founder of Twitter, is a Bitcoin supporter. He started publicly endorsing the first cryptocurrency in 2017.

Gene Simmons
Gene Simmons, the bassist and front man for the rock band KISS, is one of the biggest fans of the Cardano cryptocurrency (ADA), according to Retail Insider.

Mike Tyson
Former boxing champion Mike Tyson invested in Bitcoin in 2015 and introduced a Bitcoin ATM with his face tattoo design on it. Also, Tyson took part in the launch of the Bitcoin Direct mobile crypto wallet.

Mark Cuban
Billionaire and Dallas Mavericks owner Mark Cuban is one of the most controversial celebrities in the crypto space. In 2017, he called Bitcoin a bubble that “nobody knows when it will burst.” In 2019, he expressed doubts that Bitcoin is a reliable currency.

Other Celebs Who Tout Cryptocurrency
Snoop Dog, Ashton Kutcher, Richard Branson, Maisie Williams, Gwyneth Paltrow, and Mel B from the Spice Girls.