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Getting a Handle on Virtual Currencies

July 24, 2018 By Timothy Shanahan

MAY 31, 2018 | written by FINRA STAFF AND THE BBB INSTITUTE
This article is the first in a series on the emerging world of digital assets. Additional articles explore Initial Coin Offerings, digital tokens, the virtual currency regulatory landscape, and tips to avoid fraud and scams in this area.
Social and traditional media have been abuzz with articles and information about the rising phenomenon of virtual currencies. Words and phrases like blockchain, cryptocurrency, distributed ledger, initial coin offering, and digital tokens populate our newsfeeds.

According to the Commodity Futures Trading Commission, virtual currencies are “a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value.”

Significant uncertainty currently surrounds virtual currencies in general and their potential value as investments in particular. Only time will tell whether, and if so which, virtual currencies become a mainstream component of our financial markets—and whether investments in this emerging sector make sense as part of a diversified portfolio. Before you make any investment decisions, it is critical to understand some of the concepts underlying this emerging world of virtual currencies.
What are Virtual Currencies?
According to the Commodity Futures Trading Commission, virtual currencies are “a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value.” In other words, each currency is represented by alphanumeric codes that may be generated and recorded on a blockchain network and recognized as a method of payment by users on that network. In some cases, you can spend and trade virtual currencies, but these products do not have the same legal status as money, or “legal tender,” in the United States, Canada, Mexico, and most other jurisdictions.
The Internal Revenue Service states that virtual currencies are to be treated as property for U.S. federal tax purposes, with transactions required to be reported in U.S. dollars. If virtual currency is used to pay wages, it is subject to federal income tax withholding, and gains and losses from the sale or exchange of virtual currency have tax implications. If you hold virtual currencies for personal or investment purposes, the IRS requires you to report any gains or losses, which would be subject to capital gains tax rules.
One popular type of virtual currency is known as cryptocurrency, or simply crypto. The term crypto refers to the process of cryptography, which is a mathematically intensive encryption process designed to enhance data protection and authentication. Some people are interested in cryptocurrencies for their perceived anonymity and ability to keep transactions secret, and one of the earliest and perhaps most well-known cryptocurrencies is bitcoin.
What is Bitcoin?
Bitcoin is a cryptocurrency developed in 2009 by an anonymous person or group of persons operating under the nickname Satoshi Nakamoto. Like other cryptocurrencies, bitcoin is distinct from “fiat currencies” such as the dollar, euro, renminbi or yen. Unlike a fiat currency, bitcoin isn’t represented or organized by a physical paper unit or coin. Rather, each bitcoin is a unique alphanumeric string of computer code. Rather than being issued like fiat currencies by a central bank, a currency such as bitcoin is controlled by technology that determines how many bitcoins are produced and how transactions that use bitcoin are recorded. Proponents of the crypto world believe that bitcoin can be an attractive alternative to fiat currencies because it is not controlled by any central bank or government.
Bitcoin is exchanged on the Bitcoin Network, a peer-to-peer payment system that operates using cryptography. Users can send and receive bitcoins by broadcasting digitally signed messages to the network using a cryptocurrency wallet. Transactions on the Bitcoin Network are recorded on a publicly distributed ledger called a blockchain, and validated by a proof-of-work system called mining.
What is Blockchain?
Blockchain, also known as distributed ledger technology, is the technology that powers bitcoin and many other virtual currencies. In the case of bitcoin, blockchain functions through the participation of many individuals who offer their computing power to maintain the Bitcoin Network and record transactions (for instance, when someone trades or spends bitcoins). Those who employ math and technology to create new bitcoins are known as “miners.”
Miners engage in complex computing problems to facilitate verification and posting of bitcoin transactions. As a reward for solving these computing problems, a bitcoin miner is awarded a new bitcoin. All of this computing takes a lot of energy, which is why today’s mining centers tend to be located in regions where energy is inexpensive.
Blockchain technology is the critical feature of bitcoin because it prevents users of bitcoin from double-spending their coins and creates a permanent record of transactions.
Are There Other Cryptocurrencies?
Bitcoin is one of thousands of cryptocurrencies. The purpose, functionalities and use of these cryptocurrencies may vary. Some share similarities with bitcoin. For instance, Litecoin, created in 2011 and the brainchild MIT-cum-Google coding prodigy Charlie Lee, is similar in many respects to bitcoin but it is not identical, since it uses a different mining algorithm.
Ethereum (2015), on the other hand, is in fact a platform for “smart contracts,” which are known as conditional transactions: computer code that enable certain events to be triggered when certain pre-defined conditions are met, such as the ability to unlock real products (renting a car, for instance) when payment is made. Ethereum has its own cryptocurrency known as Ether, which can be the form of payment used on these smart contracts.
Use Caution
Knowing about virtual currencies and investing in them are two very different things. Investing in virtual currencies can take many forms: you can purchase coins in the hope they will appreciate, or invest in platforms that facilitate blockchain technology and other aspects of the virtual currency revolution and hope they succeed. Doing so carries significant risk. Only invest what you can afford to lose, and be aware that you may lose some or all of your investment.
As with other types of investing, virtual currency investing has its share of fraud and scams, not to mention cyberattacks. There are also major questions about how these currencies are regulated both domestically and across the globe. Less regulation means less protection for investors.
Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.
If you need advice regarding crypto-assets give us a call- we do that!
Tim Shanahan
CEO

Filed Under: Compass Capital, educational, Uncategorized

Chasing Performance

November 2, 2015 By Timothy Shanahan

Tom Licciardello carrying log in OCR

Tom Licciardello carrying log in OCR

Compass partner Tom Licciardello CFP has a long and rich history as a runner with the Merrimack Striders, a marathoner with over 36 Boston Marathons, Iron Man tri-athlete competitor and a regular regional and national Obstacle Course Racer. In a most appropriate sports analogy, Tom draws on this body of experience and presents in this quick video his thoughts on Chasing Performance. The bottom line is that when it comes to stellar past performance credited to “highly rated” funds, it’s important to remember that yesterday’s top performer may be tomorrow’s under-performer. For a further look, download the printed version: “Chasing performance can be like running in reverse. It’s not a race, it’s a marathon.” here. 

Filed Under: Compass Capital, Uncategorized Tagged With: funds, performance

THREE QUESTIONS THAT CAN PREDICT FUTURE QUALITY OF LIFE

September 25, 2015 By Timothy Shanahan

TFS headshot
This is thoughtful and actionable news for anyone who is considering retirement planning.  MIT AgeLab in an article by Joseph F. Coughlin, PhD, has identified three simple questions you should ask yourself to assess how prepared you are to live well in retirement.
  1. Who will change my light bulbs?
  2. How will I get an ice cream cone?
  3. Who will I have lunch with?

When it comes to retirement planning, we’re inclined to focus on accumulating assets and making sure we spend our money wisely. But while our biggest fear may be outliving our wealth, there’s an even greater risk of:

  •  Losing our independence due to ailing health;
  •  Being unable to access the big and small things that make us happy, and
  •  Facing a decline in the number of friends in our social network.

This is thoughtful and actionable news for anyone who is considering retirement planning. Read the whole article here:  WWW.CompassCapital.co/documents/three_questions.pdf

 If your family or friends need financial advisory help in this area, We do that!

 

 

Tim Shanahan781-525-6083 x 305

Providing trusted financial advice since 1984.

Visit our web site

Filed Under: Compass Capital Tagged With: retirement planning

Putting the ABLE on for the Disabled

December 22, 2014 By Timothy Shanahan

Congress Passes ABLE Act: Major Victory for Persons with Disabilities and Their Families

This is significant and actionable news for anyone who has a family member with disabilities (with an age of onset up to 26 years old)

Similar to a Roth IRA Congress has just passed an act to allow for the funding of a tax-exempt savings account that can be used for maintaining health, independence and quality of life.

Read the details about the 10 things you must know about ABLE accounts here in this article by The National Disability Institute.

An ABLE Account will provide more choice and control for the beneficiary and family. Cost of establishing an account will be considerably less than either a Special Needs Trust (SNT) or Pooled Income Trust. With an ABLE account, account owners will have the ability to control their funds and, if circumstances change, still have other options available to them.  Determining which option is the most appropriate will depend upon individual circumstances. For many families, the ABLE account will be a significant and viable option in addition to, rather than instead of, a Trust program.

Filed Under: Compass Capital

What Decision Did Retirees Regret?

November 3, 2014 By Timothy Shanahan

laidoff2If there was one decision that you regretted making in the last year- what would it be?

Did you know that early filers regret Social Security claiming decisions?

In an article by Mary Beth Franklin for Investment News she reports that nearly 40% of retirees who claimed Social Security benefits before full retirement age now regret their decision.

Imagine if you could have had the proper advice from a trusted financial advisor to prevent that mistake?

You don’t have to imagine it because that’s what we do every day at Compass. Call us now if you or a loved one needs professional pre-retirement guidance.

 

Filed Under: Compass Capital, educational

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