Five Issues Holding Back Cryptocurrency

Cryptocurrency is full of promise. However, most observers agree that promise remains unfulfilled and many doubt cryptocurrency will ever live up to its potential. This article examines five issues that hold back cryptocurrency and keep consumers from accepting it widely.

Trust

Perhaps no single factor impacts the acceptance of cryptocurrency more than lack of trust. Consumers are accustomed to assets, their government, or a combination of the two supporting their currency. However, as currently constituted, alternative currencies such as Bitcoin have no such collateral or promises backing them.

Presently, there is at least an emerging discussion on government-backed cryptocurrency. However, there is little practical movement in this area to date. And for many consumers, this creates the challenge of trust. Consumers – particularly those in developed countries – expect their governments to back or guarantee their currency. Without such backing, many are distrustful of an alternative currency and will not embrace it. Yet, governmental support is somewhat contrary to some of the fundamental premises of crypto and the blockchain technology on which it rests. Therefore, barring a breakthrough event or technology, we should likely expect this issue to remain a concern for the foreseeable future.

Taxation

In addition to the trust factor, taxation is another issue holding back widespread crypto adoption. As you likely know, cryptocurrency is subject to significant valuation swings. Therefore, consumers may realize valuation gains and losses under current tax laws when using cryptocurrency to pay for purchases. Further, as you might expect, these gains and losses are reportable under current tax laws. Additionally, anyone who trades cryptocurrency – similar to trading stocks – realizes capital gains and losses that they must report on their income tax returns.

Consumers need not worry about reporting gains and losses on currency exchanges when using traditional currencies in most countries. Therefore, continuing to use existing currencies to settle debt is more convenient than using crypto and other alternates. Moreover, consumers do not have to worry about burdensome tax reporting issues when they use traditional currencies. For these reasons, the specter of tax reporting will continue to hinder cryptocurrency from becoming mainstream.

Financial Reporting

Financial reporting is another issue currently hindering Bitcoin, Ethereum, and other alternative currencies. Specifically, many consider cryptocurrency similar to a foreign currency and, therefore, reportable as “cash” on financial statements. However, current accounting standards hold that cryptocurrency is not cash. Instead, most companies reporting cryptocurrency treat it as an intangible asset on their balance sheets. Currently, businesses should report intangible assets at fair market value. Therefore, the classification of cryptocurrency can create some significant swings on the balance sheet. Of course, these changes relate to the valuation swings cryptocurrencies experience. With cryptocurrencies volatility, shareholders could see substantial valuation changes from one period to another.

Transfer

In addition to the three issues outlined above, another hindrance to cryptocurrency is transferring it to other parties. Because of its electronic nature, you cannot write a check to transfer cryptocurrency to another party. Likewise, you cannot hand someone a paper representation of cryptocurrency, such as we would a $20 bill. Instead, you must access your digital wallet and electronically transfer the cryptocurrency to another party. Although this process is not necessarily challenging, it does create friction that does not exist with traditional payment processes.  

Further, you must take appropriate steps to ensure that you never lose access to your digital wallet. The most common issue here is forgetting the password you use to access that wallet. If you lose access, you likely will have permanently lost access to all your cryptocurrency in that wallet! Several estimates indicate approximately 20% of all cryptocurrency is “locked” in wallets that the owners can no longer access.

Volatility

The last of the five factors holding back crypto from widespread acceptance is volatility. Importantly, those who actively trade cryptocurrency – such as day traders – actually appreciate cryptocurrency’s volatile nature. For day traders, volatility in an asset’s price is how they can make large profits in short timeframes. However, consumers disdain volatility. Consumers want to have stability and predictability in prices, and volatility in their chosen currency does not provide that. Therefore, most consumers will likely continue to shy away from volatile cryptocurrencies as replacements for traditional currencies.

Several developments could help to reduce a volatility. For example, if a cryptocurrency has “hard assets” backing it, it would likely be less volatile than one with no backing. Likewise, a cryptocurrency backed by a steady government would be more stable than one without such endorsement. In turn, this backing would further ease consumer concerns.

Summary

Over a dozen years since its’ introduction, the promise of cryptocurrency remains largely unfulfilled. In theory, cryptocurrencies appear to be viable options for traditional currencies. However,  several factors currently restrain this option from becoming accepted widely by consumers and businesses alike. Among the most commonly-cited issues are the five discussed in this article – trust, taxation, financial reporting, transfer, and volatility. As markets and governments solve these issues, we should expect cryptocurrencies to move into the mainstream. However, until that time arrives, cryptocurrencies will likely remain speculative and on the fringe of mainstream society.

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Tommy Stephens