Cryptocurrencies: What Accountants Need to Know

Mar 13th 2018
man inflating bitcoin balloon
D-Keine_istock_cryptocurrencies

Wall Street has more gamblers than Las Vegas and speculative investments in cryptocurrencies exploit the same “fear of missing out” (FOMO) used by get-rich quick scammers since the beginning of time. 

In fact, the Wall Street Journal recently quoted a former SEC commissioner who sits on the board of a blockchain company describing initial coin offerings (ICOs) and the frenzy surrounding cryptocurrency investments as “the freaking Wild West – it is ‘Wolf of Wall Street’ on steroids.” In this article I am going to attempt to provide some information and background around cryptocurrencies and ICOs that could be relevant for accounting professionals to know.

The late, great P.T. Barnum is rumored to have once said, “There’s a sucker born every minute,” and the birth rate of ill-informed babies must clearly be on an upswing because the same bad decision making which gave us no-documentation mortgage loans in 2007, pet supply startups with $300 million in venture capital in 2001, 20th century llama farms, and 17th century Dutch tulip bulb futures has led to cryptocurrencies and ICOs in 2018.

For the record, cryptocurrencies are a new kind of digital money which is not backed by a central banking authority and initial coin offerings (ICOs) are the unregulated sales where investors exchange real money for units of digital money. 

The market capitalization of the top 100 cryptocurrencies as I write this in early March 2018 is $382 billion and is fluctuating wildly from day to day.  The top 100 currencies as I write this include Bitcoin, with a market capitalization of $167.4 billion; Ethereum ($72.5 billion market cap); as well as some other “currencies” which strain the already thin credibility of the industry, including the following:

  • Dogecoin (rank #37, with a reported market cap at 3/12/2018 of almost $477 million) was reportedly created as a joke.  (The Dogecoin mascot is a picture of a dog which was used in the “doge” meme – which was one of the top memes of 2013).
  • Basic Attention Token (rank #56, market cap of $276 million at 3/12/2018) is a token which can be used “to obtain a variety of advertising and attention-based services on the Brave [web browser] platform.”  Unfortunately, Brave doesn’t show up as a popular web browser much of anywhere, leading me to believe that this business model may be somewhat suspect.
  • Dentacoin (rank #74, market cap of $191 million at 3/12/2018), which bills itself as “the blockchain solution for the global dental industry.”  Wow – just what we all needed – an alternative to cash when paying dentists.

While the creators may have been joking, they are laughing all the way to the bank – the combined market capitalization of those three cryptocurrencies were over $900 million dollars at the time this is being written.

Two of the major classes of cryptocurrencies are “coins” and “tokens.” While they both can be considered, you should know:

  1. Coins are designed to be used as money – they can be used for transactions and can be divided into fractional interests.  Coins run on the same platform as the cryptocurrency – for example, the bitcoin ledger tracks the ownership of all outstanding bitcoins, and also serves as the distributed infrastructure doing the accounting.
  2. Tokens are cryptocurrencies which use another cryptocurrency platform to keep their ledger.  Many tokenized cryptocurrencies use the Ethereum platform (a Bitcoin competitor) to record the ledger for their tokens, and some companies are starting to use this and other platforms for things like private company stock ledgers, real estate title, and more.

The FOMO surrounding cryptocurrencies is so strong that the speculative market was the featured story on the March 11, 2018 episode of HBO’s Last Week Tonight with John Oliver, but he isn’t the only one who is chiming in on the cryptocurrency market, which has all of the markers of a classical asset bubble – others include:

  • The Atlantic’s Derek Thompson (January 10, 2018) penned a column titled “It Is Silly Season in the Land of Cryptocurrency” which compares the current bitcoin and blockchain enthusiasm to the dot com bubble in 2001.
  • Reuters produced a story comparing the current cryptocurrency market and an accompanying infographic showing the irrational spikes in market cap when companies change their names to include the word “blockchain”.  The average market cap of the stock tripled as soon as the word “blockchain” was added to the name of stocks.

While I remain optimistic about the future of blockchain and distributed ledger technology, I caution you to be careful when dealing with cryptocurrencies. FOMO is contagious, and is very dangerous to your nest egg.  In my life, FOMO has almost always been the beginning of bad business decisions – so remember that when something seems too good to be true, it almost assuredly is.

Note: This article is designed to provide some background and information surrounding cryptocurrencies.  AccountingWeb articles and blog posts on related topics from the last year include:

•           “A Complete Overview About Blockchain Technology” by Octal Info Solutions (covers blocks, chains, and public/private)

•           “What You Need to Know About Cryptocurrency” by Matthew May (covers tax treatment, etc.)

•           “Taxation on Overseas Income, Bitcoin and Drugs” by Craig Smalley, EA

•           “Why Bitcoin Owners Should Worry About the IRS” by Anthony M.

•           “Preparing Accountants for the Blockchain in 2018” by Craig Lebrau

•           “Blockchain: Reality or Fiction” by Ian Vacin

•           “Forensic Accounting and Cryptocurrencies” by David Kirby

Replies (3)

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By skinnyvinny
Mar 17th 2018 00:20

Great article, Brian. Nice to see an article that advises caution (or avoidance) of this highly speculative "investment". Personally, I wouldn't go near cryptocurrencies with a ten foot pole. I have a few clients who invested in this madness against my advice and are doing very badly. Surprising, as they are otherwise intelligent and successful people. FOMO, like you say.

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Replying to skinnyvinny:
Brian Tankersley, CPA.CITP, CGMA
By bftcpa
Mar 21st 2018 17:47

Thanks, @skinnyvinny. FOMO is the best tool in the scamster's toolbox, and it is everywhere these days. I have people asking about AI, machine learning, and Blockchain in accounting, and so far, the only people making money on it are the consultants exploiting the FOMO in the marketplace. Brian

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Replying to bftcpa:
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By skinnyvinny
Mar 22nd 2018 01:53

The consultants and those giving seminars are raking it in because they make money whether their clients/attendees win or lose. It's like the Levi Strauss Effect (as I believe it is called). Sell denim jeans and shovels to gold prospectors and you make money whether they go boom or bust.

Much like the real estate hucksters in 2006 with "Buy now, or be priced out of the market forever!", fear sells.

I had a client in the other day for her income tax return. Not a terribly sophisticated lady. Lost over $100k (most of her inheritance) in bitcoin. She has no other capital gains, so she'll be deducting $3k/year for a very long time!

People get giddy with things and ideas that are new, but what's new isn't always an improvement or even useful.

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