Don’t Be Afraid of Bitcoin Regulation

Bitcoin (CCC:BTC-USD) had a nice comeback developing on May 20 when the U.S. Treasury Department poured cold water on its momentum for the day.

A Bitcoin (BTC) coin sitting on a mossy piece of wood.

Source: Shutterstock

The Treasury Department announced that it was in the process of cracking down on the cryptocurrency markets. Included in the crackdown, the Treasury will now require any transfer of $10,000 or more in cryptocurrencies to be reported to the Internal Revenue Service.

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,” the Treasury said in a press release.

If you were surprised by this announcement, you have no business owning Bitcoin or any other cryptocurrency for that matter.

I say bring on Bitcoin regulation. Here’s why I feel this way.

Forget Bitcoin Being Digital Gold

If someone forced Warren Buffett to decide between buying Bitcoin and gold, I’m 100% sure the 90-year-old would choose the latter despite loathing the precious metal.

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while,” Buffett stated about gold in Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) 2011 annual report.

Unfortunately, for Bitcoin investors, the idea that the cryptocurrency really is “digital” gold is nonsense. Institutional investors who piled into Bitcoin to protect against the ravages of inflation are now piling out of it, back into gold, the world’s oldest hedge against inflation.

But before you consider dumping your Bitcoin, remember that the latest correction in Bitcoin’s price is rather unextraordinary. Coindesk published an article in April discussing this very subject.

According to Damanick Dantes, Bitcoin’s 15% decline that week was “on a par with previous drawdowns that took roughly five to 10 days to recover.” He quotes Stack Funds as saying, “drawdowns happen all the time, and crypto markets are no different from traditional markets.”

Experts generally consider significant corrections as a sign of a healthy bull market. Were Bitcoin, or any other assets, to go straight up in value, that’s a red flag that something is wrong in the economy.

I wouldn’t read into this latest correction as anything more than investors moving capital into other assets.

Why Not Regulation?

It seems crazy that someone who has a boatload invested in Bitcoin would get shaken out of a position because the Treasury Department is moving to regulate cryptocurrencies.

You would either be incredibly naïve or none too bright to think that the U.S. government would never regulate cryptocurrencies. Unless I’m missing something, Uncle Sam wants a piece of everything you earn the world over. You can run, but you can’t hide.

Achieving regulatory oversight of Bitcoin while retaining its decentralized control structure would seem to be an ideal meeting of the minds. And while not everyone is convinced that Bitcoin is decentralized, as long as the world’s major economies have regulations to protect ordinary citizens from cryptocurrency fraud, I don’t see why Bitcoin can’t be a store of value much like gold.

Morningstar recently discussed the regulation of cryptocurrencies as it pertained to the financial advisor community. I used to write for a trade publication that focused on advisors. The registered investment adviser’s biggest concern is making sure they manage their clients’ assets with the utmost care. It’s their fiduciary duty.

Because the Treasury Department and related federal agencies such as the Securities and Exchange Commission are laying out the regulatory underpinnings before cryptocurrencies really take off in use, vested interests such as investors, financial advisors and corporations are enabled to get their ducks in a row ahead of the big push.

It’s not too different from U.S. regulatory bodies getting ahead of the electrification of transportation years before it will become a problem. As the Boy Scouts say, “Be prepared.”

The Bottom Line

To me, decentralization is less about keeping the government out of my business and more about providing an efficient way to do business with others.

If cryptocurrency regulations are put in place to protect Americans, I see that being positive for Bitcoin in the sense that it provides the structure necessary to it becoming a legitimate digital currency or digital gold.

So, I say bring on the cryptocurrency regulations. Only the fraudsters need worry.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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