As the global payments industry continues to expand, new payment mechanisms have made their way into the marketplace. Cryptocurrency payments are gaining ground with many users and merchants. However, this gradual market acceptance has come with its share of controversy. Hauser Insurance Group details the logistics of cryptocurrency payments and offers considerations for investors evaluating this digital currency.
Brief Cryptocurrencies Overview
A cryptocurrency is a cryptography-derived digital currency issued in the form of “coins” or “tokens.” Designed as a payment mechanism, this virtual currency is positioned on a decentralized ledger known as a “blockchain.” Network users can utilize this digital currency to complete varied transactions. By definition, a cryptocurrency is structured to operate outside of government control and regulation.
Bitcoin is the most well-known cryptocurrency, and it has been in use for more than a decade. Since that time, other digital currencies (called “altcoins”) have emerged as alternatives to Bitcoin. However, Bitcoin’s wide user base, security features, and market capitalization have enabled it to remain the “gold standard” in the cryptocurrency industry.
3 Reasons Behind Cryptocurrencies’ Appeal
Many cryptocurrency investors are intrigued by this unconventional digital currency. Three specific motivations have spurred investors’ entry into this often-unpredictable market.
Potential Long-term Growth Prospects
SurveyMonkey states that 60 percent of cryptocurrency investors have jumped into the market because they think this investment vehicle has good long-term growth potential. By implementing this extended-range growth strategy, investors can opt out of the anxiety-producing “buy low, sell high” mindset that drives much of the investment market.
In addition, a long-term investment typically contains the least risk, and large-scale losses are less likely to occur. This is especially true if the asset is considerably volatile, as is the case with cryptocurrency.
However, this entire scenario assumes that investors will continue to consider cryptocurrency as an important part of their portfolios. In addition, the digital currency’s value would have to increase over this longer term. Because relatively few businesses have adopted cryptocurrency as a form of payment, this prediction may (or may not) come to fruition.
Short-term High Growth Potential
Another investment philosophy directly contrasts with cryptocurrencies’ supposed long-term growth potential. Short-term investors are convinced that their investment will result in a quick influx of cash. For perspective, 44 percent of cryptocurrencies investors say they purchased their digital coins for this reason.
However, this is a highly risky strategy that could also result in considerable investor losses. As with any short-term investment, correctly timing the asset’s purchase and sale is key to realizing financial success.
Enthusiasm for Cryptocurrency Trading
Surprisingly, 26 percent of cryptocurrency investors say they are driven by the sheer excitement of trading in this rapidly changing investment landscape. If these investors can easily afford to lose their principal, this gambling-like venture could provide an interesting diversion.
For most investors, however, it makes more financial sense to focus on investments that have a better chance of success. Much of the time, these relatively mundane investments have a more impressive track record compared to cryptocurrencies’ up-and-down trends.
Cryptocurrency Industry Growth
Since Bitcoin’s debut over 10 years ago, numerous cryptocurrencies have been launched into the digital marketplace. Each cryptocurrency was designed to fill a specific market niche and often draws a dedicated user base.
These increasingly popular cryptocurrencies include Ethereum, Litecoin, Cardano, Polkadot, and Bitcoin Cash. Stellar, Dogecoin, Binance Coin, Tether, and Monero round out the list of widely used cryptocurrencies.
Not surprisingly, Bitcoin has lost some market share as competitors have emerged as alternatives. Analysts say this trend will likely continue in 2022. Investors are always looking for a cryptocurrency that offers the potential for bigger gains.
Evolution of Cryptocurrency Exchanges
Cryptocurrency exchanges provide a platform for cryptocurrency trades. A third-party centralized exchange monitors crypto-to-crypto or money-to-crypto transactions. Although a centralized exchange offers customer support services, hackers can more easily penetrate this service model.
In contrast, a decentralized exchange enables cryptocurrency transactions without an intermediary. Transactions take place between equal users using an automated code. Without a single penetration point, these exchanges are more secure. However, they are also more challenging to use.
Cryptocurrency exchanges are evolving to serve newer users along with more experienced traders. Hybrid exchanges are also under development.
Trends in Marketplace Acceptance
The global marketplace has historically been slow to accept cryptocurrencies as a recognized form of payment. Although early adopters quickly came on board, most companies have been hesitant to put this digital currency on par with established payment mechanisms. Cryptocurrencies’ repeated value fluctuations, and the slower transaction times, continue to present obstacles for many businesses.
In addition, sophisticated cybercriminals could hack into cryptocurrency exchanges. This presents a problem for customers who execute transactions on these platforms. To make matters worse, cryptocurrency transactions have no fraudulent transaction protections. In contrast, credit card transactions offer a robust system of protections across the industry.
Gradual Cryptocurrency Adoption
Within the past couple of years, more businesses have begun to add cryptocurrencies to their accepted methods of payment. Large retailers, leading eCommerce companies, and well-known service providers now accept cryptocurrencies as payment for transactions. Some smaller businesses have cautiously begun to welcome cryptocurrencies as well.
In addition, certain athletes and politicians now receive part of their salaries in cryptocurrencies. Finally, Wall Street has created exchange-traded funds focused on cryptocurrencies futures.
U.S. Banks’ View on Cryptocurrencies
United States banks do not permit customers to purchase cryptocurrencies. Banking regulators are concerned that cryptocurrencies’ well-known volatility could jeopardize the banking system’s stability. In addition, there is a more practical reason for banks’ rejection of cryptocurrencies. Acceptance of this alternative payment method could threaten the bank’s business model, long based on the U.S. Dollar.
Cryptocurrencies and the Insurance Industry
As the United States’ insurance industry continues to embrace new technologies, some forward-thinking insurers are incorporating cryptocurrencies into some aspects of their operations. Certain insurance companies enable policyholders to pay their bills with cryptocurrencies. This digital payment mechanism can also be utilized for claims payouts.
As 2022 continues, further technology development will facilitate more alternative payment methods. Insurtechs, or technology-driven service providers that are helping to modernize insurance industry operations, will likely be at the forefront of these efforts. Hauser Insurance Group continues to monitor cryptocurrencies’ evolving role in the insurance industry.
Cryptocurrencies’ Well-known Volatility
Today, cryptocurrencies are gradually gaining more market acceptance. However, this payment medium has historically been known for its volatility, as price fluctuations have often occurred around external economic events.
The Federal Reserve’s Planned Rate Hikes
To illustrate, in January 2022 the Federal Reserve indicated that it plans at least three interest rate increases during the year. The Fed’s actions are in response to higher-than-expected inflation and concerns about economic stability. At the Fed’s January 2022 meeting, Federal Reserve Chair Jerome Powell signaled upcoming action to counteract both developments.
In response to the Fed’s announcement, major cryptocurrencies experienced significant price swings. Numerous investors sold off their Bitcoin and Ethereum holdings, instead snapping up “safer” investments. Experts say investors should expect more cryptocurrency market swings during the rest of 2022.
For perspective, Fed Chair Powell also stated that cryptocurrencies do not threaten the financial ecosystem’s stability. However, he reminded cryptocurrency investors of this investment class’ substantial risks. These freestanding assets are not backed by the United States government or other financial authority.
Increase in Cryptocurrency Crimes
To compound the volatility factor, the cryptocurrency industry has been plagued by numerous cybercrimes. In fact, theChainalysis blockchain data companyreleased an early 2022 report that showed record-breaking 2021 cryptocurrency crime totals.
At the end of 2021, cybercriminals had used various scams to take $14 billion in cryptocurrency funds. This figure is almost twice the $7.8 billion in cryptocurrency crime that occurred during 2020.
Common cryptocurrency scams include criminals’ use of fake identities and insistence upon cryptocurrency payments for transactions. Cybercriminals also executed assorted investment schemes and phishing scams to generate cash.
Red Flags for Investors
Warning signs for potential cryptocurrency scams are similar to those seen in credit card fraud and money-wiring scams. Besides glaring errors in communications and social media posts, investors should watch for othercryptocurrency transaction red flags.
Investors who notice suspicious activity should report it to the appropriate cryptocurrency exchange. In addition, the investor should notify the following three agencies:
- Federal Trade Commission:ftc.gov
- Commodity Futures Trading Commission:gov/complaint
- S. Securities and Exchange Commission:sec.gov/tcr
Incidents involving blackmail or extortion should also be referred to the FBI.
Potential Government Cryptocurrency Regulation
Federal lawmakers are engaged in ongoing debate about laws and regulations for the cryptocurrencies industry. The legislators’ goal is to create a safer cryptocurrencies investment environment. Ideally, this less-risky investment setting will also make it much harder for cybercriminals to exploit this payment medium.
Government officials may not be thoroughly aligned on the need for cryptocurrencies regulation. Jerome Powell, the Federal Reserve Chair, said in early 2022 that he has “no intention” of prohibiting cryptocurrencies use in the United States. However, Gary Gensler, the Securities and Exchange Commission Chairman, recently commented that investors are “likely to get hurt” without the introduction of more robust cryptocurrencies regulations.
How Regulations Could Affect Investors
Even without the passage of new laws and regulations, American cryptocurrencies investors are well advised to retain records of their cryptocurrencies transactions. Specifically, the late-2021 $1.2 trillion infrastructure bill (now law) contains provisions that enable the IRS to more easily track cryptocurrencies transactions. The IRS may be especially interested in capital gains and losses on these sales.
Not surprisingly, already-volatile cryptocurrencies prices can also be affected by such regulatory announcements. For that reason, investment experts recommend that investors limit cryptocurrencies investments to under 5 percent of their total investment portfolios.
About Hauser Insurance Group
Hauser Insurance Group is a leading commercial insurance agency based in Cincinnati, Ohio. Founded in 1971, this privately held company specializes in commercial risk management and targeted insurance solutions. Hauser has also become known for its comprehensive employee benefits management services.
Serving Clients in Diverse Industries
Hauser’s private equity market expertise is recognized throughout the industry. This well-rounded knowledge enables the firm to provide unparalleled due diligence services to companies preparing for a merger or acquisition.
In addition, public companies (including publicly traded retail entities) and family-owned industrial businesses are part of Hauser Insurance Group’s client database. Hauser also provides services to special-purpose acquisition companies (or SPACs) and multinational corporations.
Targeted Risk Management Solutions
Hauser Insurance Group believes using a consultative approach will yield the most effective solutions. First, the firm’s risk management experts identify the client’s specialized risk exposures and coverage gaps. Hauser’s merger and acquisition consultants frequently play a key role in this process.
Finally, the company’s skilled private equity brokerage team members step in to implement the targeted solution. Clients often realize long-term cost reductions along with reduced risk exposures.
Providing Services Across the United States
Hauser Insurance Group’s offices are well positioned to serve geographically diverse clients. The firm’s New York City and Atlanta offices work with East Coast companies.
Besides its Cincinnati headquarters, Hauser maintains Midwestern service hubs in Chicago, Kansas City, and St Louis. West Coast clients receive services via the firm’s Los Angeles office.
Elsewhere in the country, businesses of all sizes enjoy efficient service via seamless electronic communications.
Cryptocurrency payments are becoming more common in many industries. Hauser Insurance details the payment medium’s logistics and offers investor considerations.