How Should Christians Approach Cryptocurrency and Digital Assets?
Bitcoin, Ethereum, crypto, digital assets, and NFTs are all words that have been overtaking the news and social media for the last few years.
But what are they and what’s the big deal? Most importantly, how should we view and approach this new and emerging asset class?
If you haven’t done so, go back and read March’s post about Decentralized Finance (DeFi) and how Christians should view it.
Digital Assets Explained
"Digital asset" is probably the best universal and blanketing term when discussing assets, or anything you can own, in the DeFi, and subsequent crypto, space.
*Note that I may use digital asset and crypto interchangeably but I’m referencing the same thing.*
I mentioned in the last blog post that DeFi, along with digital assets, is still very young. With this has come a lot of misnomers and misinformation in regards to digital assets (i.e. using terms interchangeably when it isn’t appropriate).
Gemini.com defines a digital asset like this, “Broadly speaking, a digital asset is a non-tangible asset that is created, traded, and stored in a digital format.”
I’ll cover some of the most popular digital assets right now.
Cryptocurrency
Cryptocurrency is perhaps the most talked-about digital asset.
So what exactly is “cryptocurrency”?
Gemini defines it as such: “A cryptocurrency is the native asset of a blockchain network that can be traded, utilized as a medium of exchange, and used as a store of value.”
For example, bitcoin (BTC) is the cryptocurrency for the Bitcoin network and Ether (ETH) is the cryptocurrency for the Ethereum network.
Cryptocurrencies may also be referred to as “coins” (if operating on their native network/blockchain).
A blockchain is a distributed ledger that utilizes peer-to-peer consensus for validating transactions and a secure algorithm to cryptographically link transactions in chronological order.
To participate on a specific network or participate in applications that run on a specific network then you will need that network’s cryptocurrency.
For example, if you’re a citizen and live in the United States then the United States would be the “blockchain network” and the U.S. Dollar would be the “cryptocurrency”. You would need the native currency, the U.S. Dollar, to conduct transactions within the United States.
The same is true with cryptocurrencies. If you’re hoping to participate in the Bitcoin network then you would need bitcoin, the currency.
As described above, the main benefits of cryptocurrencies are that they can be traded, store value, and utilized as a medium of exchange.
Crypto Tokens
Crypto tokens are another descriptor that’s been used to describe cryptocurrency AND digital assets.
Tokens largely represent currencies that don’t have their own blockchain network. They may also represent an asset or a right.
Tokens become tokenized via a smart contract to operate on a blockchain that isn't theirs.
“A smart contract is a computer program or a transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement.”
Or in other words, smart contracts use IFTTT (If This Then That--or "if this happens then that will happen") logic.
There are various types of tokens such as DeFi tokens, Governance tokens, Non-Fungible Tokens, and Security Tokens.
DeFi Tokens
These tokens aim to replicate a traditional financial system but in a decentralized landscape. Lending, saving, trading, and acquiring insurance are just a few ways to use DeFi tokens.
Governance Tokens
Governance tokens give the holders a say in the future of a specific protocol or app. Much like owners of stocks get to vote on certain items for a particular company.
Non-Fungible Tokens
Non-Fungible Tokens, or NFTs, have been one of the crazes within the last year or so. NFTs represent ownership rights to a unique digital or real-world asset.
The important distinguishing feature of NFTs is that they are “non-fungible.” When something is fungible it means that it can be replaced by an identical item, or mutually interchangeable. If you and I both had a dollar we could trade our dollars and our circumstances would be the same.
To be non-fungible means two things can’t be replaced with each other because of their uniqueness.
Investopedia describes NFTs like this, “They are digital representations of assets and have been likened to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens.”
NFTs have gained a lot of popularity in the digital art and collectible space but have also been linked to deceitful practices (i.e. pump and dump).
Security Tokens
Security tokens are the equivalent of stocks and bonds within the crypto environment. Security tokens would find use in selling shares of a company or lending money to a company, or other enterprise, without the use of a broker.
For example, a start-up company may opt for selling tokens to raise funds as opposed to the more traditional route of using an investment banker.
The Good and the Bad
So obviously there are pros and cons to digital assets but what are they?
*These are just a handful of the pros and cons that come to mind but this isn’t an exhaustive list.*
Pros
Diversification
“An asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. ”
Digital assets have presented a new asset class for investors to partake in. Diversification is important so that all your assets aren’t moving in the same direction at the same time. Overall, this helps mitigate the overall risk of your investment portfolio.
However, right now we still see some correlation tied to stocks. I think it will still be a while until we see more uncorrelated behavior from other asset classes.
Decentralization
As I mentioned in my previous post, decentralization has the opportunity to bring many benefits where traditional finance falls short.
Decentralization aims to move authority and control from one, or few, central powers to many.
For example, in the case of cryptocurrency, a central bank or government wouldn’t be able to manipulate the currency to their will.
Appreciation, Income, and Stability
It’s important to understand that digital assets present many of the same opportunities that traditional assets do. Even though digital assets may share some of the same characteristics they can often be more volatile.
Many people invest in traditional assets (stocks, bonds, real estate, etc.) for capital appreciation, stability, preservation, income, and speculation.
The same qualities can be found within digital assets. Some currencies and tokens can even be “staked.” Staking is the process of using your currency or tokens to contribute to the transaction validation process. You typically “lock up” your crypto for a period of time but then earn a predefined amount after the process is over. This can be similar to earning interest or dividends in which you can choose to reinvest if you choose.
So when you couple these qualities with something like decentralization then it makes for a compelling argument to expose yourself to digital assets.
Cons
Extremely Volatile
This comes as no surprise to many. But one of the cons of digital assets, depending on your view and tolerance, is that they can be extremely volatile. So if you’re trying to invest in digital assets and expect a pretty smooth ride then you’ll be in for a rude awakening.
Even some of the more “stable coins” have been known to be volatile. For example, at the time of this writing UST has declined 30% in the last 24 hours because it lost its peg which maintained a 1:1 value with the dollar.
Even fast upswings can force sales, to capitalize on gains, and thus trigger capital gains taxes with very little time to plan on how to reduce said taxes.
Volatility should be expected with investing in anything. However, with digital assets, the swings are much more profound.
Nefarious Activity
Because digital assets are still weakly regulated you can bet on there being nefarious activity. There are scams left and right and unethical practices abound. Because of this, it makes many individuals very cautious to get involved, and for good reason.
The most popular unethical practices I’d say are fraud and pump and dump schemes.
“Pump and dump is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, to sell the cheaply purchased stock at a higher price.”
On the contrary, illicit activities such as cybercrime, money laundering, and financing terrorism make up very few cryptocurrency transactions. Axios reports that approximately 0.15% of cryptocurrency use was attributed to illicit activities.
This is because all transactions are fully transparent on the blockchain which makes tracking the flow of money extremely easy.
Participation Can Be Complicated
As a beginner, it’s fairly easy to set up an account at Coinbase or Gemini to buy and sell digital assets. But to have full control over your digital assets you’ll need to establish a digital wallet that holds your digital assets.
This is where things can get complicated quickly. If the assets aren’t stored in your personal, digital wallet then it’s a mere IOU on the books from the custodian (similar to traditional investments). Remember, separating your assets from centralized authorities is one of the benefits of DeFi.
Moving digital assets between wallets can be complicated and irreversible. For example, if you send some cryptocurrency to the wrong digital wallet you may never be able to recover the assets.
On top of the complexity of operating your digital asset portfolio, the research of protocols and projects takes significant time and energy to evaluate to determine if they are worthwhile to invest in.
Again, you can get started very easily but the more you want to expose yourself to the DeFi fundamentals the more complicated it will get.
Christian Perspective
When it comes down to it, scripture, biblical principles, and wise counsel should guide us through all financial decisions. Remember, every financial decision is a spiritual decision because we’re stewards.
*You may notice the below points are the same as the last blog post. This is because the fundamentals remain the same.*
Submitting to Authority
First, as Christians, we need to remember that we should always live above reproach.
For DeFi, this means submitting to the laws and regulations that the government and other authorities have put in place despite maybe having a good reason to subvert such authorities.
“Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God. Therefore whoever resists the authorities resists what God has appointed, and those who resist will incur judgment.”
I’m all for innovation, disruption, and for the status quo to be challenged, especially where injustice or oppression exists, BUT I also believe that as Christians we need to submit to the proper authorities.
As of now, Congress is taking the path to regulate aspects of decentralized finance (i.e. trading of cryptocurrency and digital assets, taxation of digital assets, etc.) rather than outlaw it like some other countries. Even though this is contrary to the whole purpose of DeFi.
There are still a lot of unknowns about what the future will look like for DeFi and regulatory environment but we should be ready to follow the law of the land.
Lead with Wisdom
It’s pretty apparent that DeFi is still very young AND very much still the wild wild west. This means that we should approach it with caution. Even though it’s created capacity for a lot of good things, there’s still been a lot of bad players in the space that have taken advantage of individuals in one way or another (i.e. theft, pump and dump schemes, etc.).
“Without counsel plans fail, but with many advisers they succeed.”
DeFi, as a concept, may be new but the dangers are old as time. As King Solomon said in Ecclesiastes, “What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.”
We, at the Christian Financial Advisors Network, are big on having the proper counsel in life and this is no different. If you’re interested in exploring DeFi then it’s of utmost importance that you have someone in your corner that can speak wisdom into your situation.
A Christian financial advisor is ideal because they can address the needs of your personal finances but can also add the biblical wisdom that's needed for discussing DeFi.
As with traditional investing, it’s important to only invest in what you understand and only take the risk that’s appropriate for your profile.
Guard Your Heart
Something I’ve seen pretty consistently within the DeFi space is greed and the notion of “get rich quick”. Some people are making life-changing money. This isn’t to say that their decisions don’t carry any risk because they often carry significant risk.
“Above all else, guard your heart, for everything you do flows from it.”
This is probably one of the most dangerous aspects of this new frontier. It’s also something that looks pretty familiar to the dot-com bubble for older individuals that may recall.
The FOMO (fear of missing out), accessibility, and lax regulation create the perfect storm for discontent hearts to be vulnerable.
Proverbs 13:11 warns about the danger acquiring wealth quickly (typically done through significant risk),
“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”
Greed and idolatry can easily creep into our hearts in the most subtle way if we aren’t constantly protecting them.
I’m a financial professional and I've even felt the FOMO and unhealthy stirrings at times. I’ve also seen other Christians battle obsession and idolatry.
This is another reason it’s so important to have accountability and counsel to guide you on your stewardship journey. We can’t and shouldn’t go at it alone.
And we must constantly remember that God owns it all and that we’re stewards of what He’s entrusted to us. This should continue to calibrate our hearts and minds to His will and desire for us.
Conclusion
Digital assets is a very exciting space right now. The feeling is like when a very new piece of technology is released (i.e. smartphone, smart devices, high-speed internet, ) that can change everything.
But as with everything new and novel, we need to approach it with healthy skepticism and due diligence.
It’s important to only invest in things you understand and that fit appropriately with your risk tolerance to accomplish your financial goals.
As always, feel free to reach out to one of our advisors should you need guidance on your stewardship journey!
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