Money has three primary functions: to serve as a unit of account, a store of value, and a medium of exchange. While cryptocurrencies are often described as a form of money, they actually don’t possess any of these characteristics. As a result, they aren’t really a substitute for cash, but rather an alternate investment, with a very different risk/return profile as compared to cash.
As retail investors become increasingly interested in cryptocurrency, it is important to consider the volatility of the crypto market and the effect it could have on your long-term financial security. While we cannot provide financial advice (you should consult with your financial and tax advisors before making any investment decisions), below we have highlighted some of the differences between holding cryptocurrencies vs. keeping your cash in the bank.
Cryptocurrency prices are highly volatile.
Many people have been attracted to cryptocurrencies in hopes of earning a quick profit or lending their cryptocurrencies out to other people in return for “interest” in a process called staking. However, cryptocurrency prices can fluctuate wildly based on a myriad of non-financial factors, making them subject to the whims of an opaque market, and crypto staking involves taking counterparty credit risk, which is inherently risky. Because cryptocurrencies and the exchanges on which they trade aren’t regulated, they are also exposed to the risk of market manipulation. Many financial advisors consider cryptocurrency to be suitable for only the most affluent investors who can afford complete and total loss of principal. In many ways, cryptocurrency is the polar opposite of cash in terms of both safety and volatility.
Converting is costly.
Nearly all crypto trading platforms charge a hefty fee for converting your cash between crypto and fiat currency. Some platforms charge as much as 3-4% in fees when you purchase and when you sell, so it’s important to read the fine print and understand that fees could significantly impact your net investment returns.
Cryptocurrencies may be illiquid.
In order to liquidate cryptocurrencies, you must first find a platform to sell the coins and then transfer the funds to your checking/brokerage account. While many crypto trading platforms have made it very simple to buy cryptocurrencies in the first place, there can be no assurance that a liquid trading market will exist in the future, meaning that once you purchase cryptocurrencies you may never be able to sell them, particularly if there is a run on a cryptocurrency and everyone tries to redeem their coins at once. No consumer protections exist to prevent the equivalent of a bank run on cryptocurrencies.
Crypto is not FDIC insured.
Cryptocurrencies are a highly speculative asset class, are not FDIC-insured, and are subject to the risk of complete loss. There is little by way of regulation to protect individual investors from theft or fraud.
Filing for taxes can be complicated.
The sale of crypto may be a taxable event. Some crypto platforms make tax reporting easier than others, but many crypto platforms have no infrastructure in place to help investors report taxable gains or losses. Failure to report income on cryptocurrency trades may subject you to interest, penalties, and potentially criminal prosecution.
Cash Held in FDIC-insured Savings Accounts
Cash is stable.
While inflation can erode the value of the dollar over time, earning the highest interest rate possible can help protect your purchasing power. Platforms like MaxMyInterest.com can help.
U.S. dollars are backed by the full faith and credit of the U.S. Government and a large number of regulations are designed to monitor the soundness of financial institutions and protect the safety and security of your accounts.
Cash is liquid.
If you need to move funds same-day, you can request a wire transfer from any of your bank accounts to any of your other bank/brokerage accounts. As an example, domestic and international wire transfers from Max Checking are free of charge for all Max members.
Funds can also be transferred by ACH, which takes 1-3 business days and is also free of charge to all Max members. ACH is protected by Reg E, which provides a regulatory mechanism for reversing unauthorized transfers provided that they are reported within 60 days. (By contrast, transfers of cryptocurrency are generally thought to be irreversible.)
Filing for taxes is easy.
Every year, banks supply clients with 1099-INT statements that show all of the interest earned, making it easy to complete annual tax filings.
Max includes a helpful feature called Consolidated Tax Reporting. Each online bank prepares a 1099-INT statement for any accounts that have earned at least $10 in interest during the year. With one click, Max will attempt to gather the 1099-INT statements for all of your linked online savings accounts and will deliver them to you by email in a single password-protected PDF file that you can print or forward to your accountant by email.
Funds held in savings accounts are FDIC-insured up to the applicable limits.
FDIC coverage is a government program that provides deposit insurance in the amount of $250,000 per person per ownership category. As such, individual accounts are insured up to $250,000 at each bank, and joint accounts can be insured up to $500,000 at each bank ($250,000 per depositor). Since individual accounts and joint accounts are considered to be different ownership categories, a couple can obtain up to $1,000,000 of insurance at each bank by opening 3 separate accounts: one account in the name of each individual, and a third account held jointly. Using a trust account with multiple beneficiaries is another way to obtain even more FDIC insurance coverage.
Max helps members spread their cash out across multiple banks to offer expanded coverage while helping them stay below the FDIC insurance limit at each bank, maximizing FDIC insurance coverage.
For more information about FDIC insurance, visit https://edie.fdic.gov
To learn more about Max and how Max helps you earn the highest possible yield on your cash while keeping it in your own FDIC-insured bank accounts, please see: How does Max work?