Cryptocurrency: Legal Path To Billionaire Status?

Cryptocurrency has been making headlines for its sky-high returns, with Bitcoin surging 372% in a year, Ethereum up by more than 1,500% in the same period, and Dogecoin soaring by over 19,000%. These monumental gains have led to a surge in crypto investors, with many wondering if they could legally become billionaires through crypto investments. While it is legally possible to become a billionaire through cryptocurrency, it is important to understand the risks and legal considerations associated with this highly volatile and speculative investment.

Cryptocurrency's decentralised status

Cryptocurrency is a digital or virtual currency that is secured by cryptography, making it nearly impossible to counterfeit or double-spend. Most cryptocurrencies exist on decentralised networks, which are outside the control of governments and central authorities.

Decentralisation is a spectrum, and some platforms are more decentralised than others. Decentralised systems have no single point of failure and cannot enact changes unless the majority of participating parties agree, reducing the likelihood of a successful attack or corruption.

The decentralisation of a blockchain platform can be measured by the size of its cumulative hash rate and the number of entities it is divided among. Other factors to consider when determining the decentralisation of a blockchain platform include governance, development control, network accessibility, and figurehead influence.

The advantages of cryptocurrencies include cheaper and faster money transfers, and decentralised systems that do not collapse at a single point of failure. The disadvantages include price volatility, high energy consumption for mining activities, and use in criminal activities.

While it is possible to become a millionaire or a billionaire through cryptocurrency investment, it is important to remember that it is a high-risk investment. The right strategy can improve your chances of making money over time.

Crypto and tax laws

The IRS treats cryptocurrencies similarly to other capital assets, like stocks and bonds. This means that any time you exchange virtual currency for real currency, goods, or services, you may be taxed on the profits. The tax rate depends on how long you held the cryptocurrency before the sale. If you owned it for one year or less, you'll generally pay a higher tax rate, whereas if you owned it for more than a year, you'll pay a lower long-term capital gains tax rate.

• If you mine cryptocurrency as a business, you may be able to deduct your expenses, treating it like any other business income.
• Gifting cryptocurrency is treated the same as gifting other assets, and may be subject to gift tax if it exceeds certain thresholds.
• Inherited cryptocurrency is also treated like other inherited assets and may be subject to estate taxes.
• The wash-sale rule, which prohibits claiming a tax loss if you buy or sell a similar asset within 30 days, does not apply to cryptocurrency. This means you can sell crypto for a loss, claim the tax break, and immediately buy it back. However, this loophole may be closed in the future.
• Cryptocurrency exchanges are not required to send taxpayers a Form 1099 reporting income, so it's important to keep track of your own transactions and report them honestly to the IRS.
• Failure to report cryptocurrency transactions or underreporting income can result in fines and penalties from the IRS.

Crypto as a long-term investment strategy

Investing in cryptocurrency can be a lucrative option, as evidenced by the many crypto investors who have become millionaires and billionaires. However, it is important to remember that crypto is a very high-risk investment due to its high volatility. As such, it should be approached with caution and a well-thought-out long-term investment strategy.

One popular strategy for long-term crypto investment is to "hodl", a term derived from a misspelling of "hold" in a bitcoin forum in 2013. This strategy involves buying cryptocurrencies and holding onto them for the long term (2-5 years), without getting caught up in the emotional rollercoaster of the volatile market. This method has proven successful for many non-professional investors, as it eliminates the stress of constantly checking prices and allows investors to focus on other things. It also ensures that investors are less likely to make impulsive decisions based on market fluctuations.

To implement this strategy, investors should first agree with the following assumptions:

• Blockchain technology will be a significant horizontal innovation, impacting our lives in a similar or greater way than the internet.
• Crypto will attract the mass market in the next 2-5 years, with more users, investors, and developers entering the space.
• Crypto will be accepted and regulated by traditional financial institutions and governments, establishing itself as a new asset class.
• Most financial institutions will include crypto in their standard offering for clients.
• Cryptocurrencies will evolve from being primarily a speculative investment asset to a usable good in their ecosystems.
• High levels of volatility will persist in the coming years due to hype, retail investors, leverage, and market manipulations.

Once these assumptions are accepted, the following steps can be taken:

• Open an account with a crypto exchange, such as Kraken, Binance, or Coinbase, and purchase "blue-chip" cryptocurrencies like Bitcoin and Ethereum.
• Buy a hardware wallet, such as Ledger or Trezor, and transfer your coins from the exchange to the wallet for safekeeping.
• Stake the coins that can be staked on the hardware wallet to generate a passive yield while holding them. Alternatively, for those less risk-averse, staking can be done on an exchange.
• Store the wallets in a secure location, such as a bank locker, and keep the recovery phrase separate to restore access if needed.
• Forget about your investment for 2-5 years, allowing it to grow without the stress of constant monitoring.
• After the specified time, transfer the coins back to an exchange and cash out, or start using them within their ecosystems.

It is important to remember that this strategy requires mental fortitude and discipline, as it can be challenging to ignore market fluctuations. Additionally, only invest what you can afford to lose, and ensure you have a diversified portfolio that includes traditional assets.

While there are no guarantees in the world of crypto, implementing a long-term investment strategy can help increase your chances of success and reduce the stress associated with the volatile nature of the market.

Crypto's high-risk, high-reward nature

Cryptos High-Risk, High-Reward Nature

Cryptocurrency is a highly speculative investment. Its high-risk, high-reward nature is characterised by extreme volatility, with prices fluctuating wildly in either direction. The potential for monumental gains is counterbalanced by the ever-present risk of catastrophic losses.

Risk Factors

The primary factor contributing to the high-risk nature of cryptocurrencies is price volatility. The more prices fluctuate, the more uncertain investors feel about purchasing these digital assets. The wider the range between the highs and lows, the greater the risk.

Additionally, the stage of a crypto project's development is a crucial determinant. Investing in new projects, particularly those in the presale stage, is inherently riskier. While these tokens are usually available at low prices during the presale, there is no guarantee that their value will increase after the release.

Mitigating Risk

For those seeking to invest in high-risk, high-reward cryptos, there are several strategies to consider:

• Focus on presale projects: While these are highly unpredictable, they offer the potential for significant gains as they are often sold at discounted prices.
• Buy in the bear market: A fundamental rule for crypto investors is to buy when the coin's price is low and sell when it's high.
• Consider the crypto's market cap: Cryptocurrencies with the most upside potential typically have a low market cap, providing more room for growth.
• Invest in meme coins: Meme coins, such as Shiba Inu and Dogecoin, have the potential for high returns. For example, Dogecoin's price spiked by 20% after Twitter's CEO changed the platform's logo to the DOGE meme.

Examples of High-Risk, High-Reward Cryptos

• Bitcoin (BTC): Despite its volatile nature, Bitcoin has posted remarkable returns, such as an 82% year-to-date return in 2023. However, it lacks practical applications and is primarily a store of value and medium of exchange.
• Ethereum (ETH): Ethereum has significantly influenced the realm of tokenisation and smart contracts. It has posted impressive returns, such as a 60% year-to-date return in 2023, but faces competition from challengers like Solana.
• XRP (XRP): XRP is a high-stakes option that is not for the risk-averse. It has seen impressive returns, with a 73% ROI in 2023 prior to a favourable legal verdict, and its total 2023 surge stands at 107%.
• Dogeverse (DOGEVERSE): A multi-chain meme coin that raised $15 million on presale, catching the attention of "whale" investors.
• Sealana (SEAL): Inspired by South Park, this coin is set up on the Solana ecosystem, similar to successful projects like Pepe and Bonk.
• WienerAI (WAI): An AI crypto coin based on the Ethereum network, offering advanced AI tools for market analysis and insights.
• Mega Dice Token (DICE): A GameFi casino with daily rewards based on performance.

Crypto's complex and evolving legal status

The legal status of cryptocurrencies is complex and ever-evolving. Cryptocurrencies are decentralised, meaning they have no physical presence and are not backed by a central authority. This lack of central authority can be a legal and financial risk to cryptocurrency owners. While it frees investors from being beholden to institutions, it may also result in legal complications. For example, the value of cryptocurrencies is entirely dependent on the value ascribed to them by other owners and investors, and without a central authority, investors may be left vulnerable if complications arise.

The regulatory landscape for cryptocurrencies is still unsettled. The wise investor should consider reporting their holdings as foreign assets, although the requirements remain unclear. In the US, the IRS has defined cryptocurrencies as property, meaning investors are subject to capital gains tax laws when reporting profits and expenses on their annual tax returns. Cryptocurrency investors need to keep up to date with the latest pronouncements from government tax authorities, as their views are evolving.

The legal standing of cryptocurrency is murky due to its newness relative to traditional currencies and payment systems. This newness also means that the path of legal recourse in the case of disputes is difficult to assess. Cryptocurrency investors assume certain legal risks when they buy and sell, and while it is possible to become a billionaire through cryptocurrency investment, it is a highly speculative endeavour.

Frequently asked questions