Cryptocurrencies are a thing, but should you invest and, if so, how much?

At the BiTA Symposium in Atlanta today, Matthew May, Co-founder of Acuity led a session on cryptocurrency accounting. Self-described blockchain enthusiast and cryptocurrency skeptic, May is a CPA on a mission to help entrepreneurs build scalable accounting processes for growing businesses. He is co-founder of Acuity, a firm that does back office accounting for people and businesses working with and in cryptocurrencies. Their customers tend to be hedgefunds, crytopcurrency miners, and the largest amount are the ERC utility token holders. May sees blockchain as being the bigger solution, but there’s a lot to learn in the speculative realm of cryptocurency.

Cryptocurrency is just this one thing that blockchains work well with, although the two are often conflated. There are essentially four different kinds of cryptos, as May defines them.

Dash or Bitcoin cash are trying to be a currency. Maybe a crypto could hold value over time much like gold or silver? What if Bitcoin is like gold and Litecoin is like silver? Some say it could happen. What Ripple is doing is different. They’re trying to replace the bank system. Ethereum tries to be a little bit of everything. They have a utility token. It’s just revenue you might get in the future somehow. Much like this cooler. Ethereum has built this network that’s created a utitliy token. Most of the practical applications will be in the form of prepaid revenue like the Ethereum model.

Is cryptocurrency an investment? Until the volumes of the transactions of the utility tokens shifts from crypto to crypto and entering into the main public exchanges, there will be volatility and its hard to say what the practical applications will be. But the top managers in the space are acknowledging that it’s a thing, but you shouldn’t put more than 1 percent of your net wealth into them. Put less than 1 percent in crypto versus fiat currency.

If you’re going to invest you should find out who is in charge. Is it a foundation, a for profit company, or are they coin holders themselves?

If you’re a business, do you want to accept crypto? It could be “no” and that’s the end of discussion. If yes, you could have Bitpay or Quickbooks to have no volatility. Or if you say yes and really accept it into a drive, refer back to the “less than 1 percent” idea.

May says he does think it’s coming. In light of that, there are four main risks. The first is well-covered: volatility. Everyone seems to have a sense of this.

Another one that isn’t talked about much: Bitcoin transactions fees have skyrocketed to $28 per transaction. It’s essentially undermining the value of the coin for making small transactions.

“This is probably one of the bigger risks that people are dealing with,” says May.

Another is liquidity. There are three main buckets of liquidity, crypto you can get to fiat like Gemini and Coinbase. Ethereum and Bitcoin are the main four that do this. Then there are the Crypto Exchanges of which there are about 150, ones like Bittrex, Binance, Shapeshift, etc. and you can convert these into the top four. These are considered the intermediaries. Then there is the bottom thousand, which May calls the “good luck” category.

Counterparty risk is probably the least talked about, but perhaps the most important for business. There’s little to no regulation, rules, and therefore recourse for these exchanges. Regulators are really trying to catch up. So, it’s possible that a place could go bankrupt and just shut their doors. Cryptos aren’t your keys, aren’t your coins. May says this is something you should be able to control. Only use exchanges for their express purpose, go crypto to crypto, or crypto to fiat.

For tax issues, the IRS is saying that they’re treating it like property. The accounting is almost identical to day trading stocks (just a different form). There are three tools that are leading the pack for business applications. Verady, Balanc3, and Libra are platforms that help people get the transactions into legacy systems. Tax forms 1099-K (a money transmitter form) and Form 8949.

The US Regulatory environment is May’s “favorite” topic. We have four different regulatory agencies saying four different things. The SEC is calling it a security. The IRS is calling it a property. CFCT is calling it a commodity, and FinCen scared everyone by calling it a currency. The FinCen letter really got knee jerk reactions to discourage people. We all want to see enforcement, especially on the dregs, the people that aren’t trying to make a difference, and from everything we’ve heard from the regulators that’s where the direction is going. The IRS you’ve got to stay compliant with, as the SEC and FinCen gets some clarity, let’s comply there, says May.

Be mindful and try to do the best you can and go with the spirit of the law because the letter of the law is absent.

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