5 Cryptocurrency Risks Your Clients Need to Know

Cryptocurrencies have become more and more popular with the general public, and because of this accountants are fielding a wide range of questions from their clients about them. These questions relate to the tax implications of owning and trading cryptocurrency as well as to questions relating to accepting cryptocurrency payments and holding cryptocurrencies. It is important for accountants to convey to their clients that investing in cryptocurrencies comes with considerable risk.

Conversion

Some cryptocurrencies are not that easy to convert into traditional currencies, such as dollars. Oftentimes there is insufficient liquidity on a cryptocurrency exchange to make a trade. You cannot even directly convert a number of cryptocurrencies into physical money. You first must convert them into a more common cryptocurrency, which you can then convert into a traditional currency on a different exchange.

So, your clients should understand that they may not have quick access to money they have storied in cryptocurrencies.

Exchange

Your clients will likely make many of their cryptocurrency transactions, including trades, payments and conversions, through a counterparty such as an exchange. Clients should be made aware that these exchanges are private non-regulated entities that cannot guarantee the safety of your money. In fact, a number of these exchanges — most famously Mt. Gox — have lost large amounts of their clients’ money.

So, your clients should limit the amount of cryptocurrency they keep with counterparties.

Price Volatility

While cryptocurrencies of late have enjoyed a period of relative price stability, in the not-so-distant past there was great price volatility, in all directions. This is especially a concern if your clients will take payments in cryptocurrency. Your clients need to understand the risks of accepting and holding an asset that is inherently unstable, and they must plan well ahead of time how to handle this risk.

 

Transactions Fee Volatility

In the early days of cryptocurrencies, transaction fees were so nominal that many cryptocurrency users did not notice them at all. But as cryptocurrencies have become popular, their associated transaction fees have increased as well. Last year, at the height of Bitcoin mania, a single transaction cost nearly $60, regardless of the amount of the transaction. While transactions fees have come way down since then, there is no guarantee that they won’t skyrocket again in the future.

So, your clients should plan for this volatility.

Storage

There are a number of different ways your clients can store cryptocurrency, which is essentially digital keys consisting of lots of numbers and letters. There are both software-based wallets and hardware-based ones. The latter is more secure than the former, but they can still be stolen or destroyed, and both can be hacked. Larger investors also have access to custodial services, but these are not without cost.

All this means that clients should be made aware of the risks of holding cryptocurrency, which often cannot be effectively mitigated.