Commodity or Security: How This 1 Question Can Save Your Crypto Portfolio

Before the latest price surge, the beginning of March was a tough time for crypto. More lawsuits against crypto companies followed, and fears of upcoming regulation grew as investors braced for the worst.

Since then, talks of widespread regulation appear to have cooled as the recent banking fiasco has taken center stage and the crypto market has been in tatters. But there is still good reason to believe that crypto regulation is coming to the US, and investors need to make sure they are prepared when that day arrives. It’s not so much a question of if, but when.

The current crypto landscape

Due to the complexity and scope of the cryptocurrency asset class, lawmakers have struggled to implement any comprehensive regulation. Despite this, previous comments from key officials have shed light on the possible course of action they will take, and it boils down to one thing: Is crypto a commodity or a security?

To answer this polarizing question, lawmakers typically invoke what is known as the Howey test to define whether an asset is a security. The Howey test takes its name from a 1946 Supreme Court case, and analyzes an asset in four ways to determine whether it is a security. The Howey test states that assets are considered securities if it is an investment of money in a joint venture with the expectation of profit from the efforts of others.

I hate to be a buzzkill, but this sounds like most cryptocurrencies in circulation today.

What threatening regulation can look like

So why does all this matter? Well, it’s relatively easy. Should lawmakers consider most crypto to be a security, that means the entire landscape will change dramatically. Just like publicly traded companies that offer shares, cryptocurrencies that are considered securities will need to be registered and comply with rules enforced by the Securities and Exchange Commission (SEC). This will ultimately lead to stricter reporting to ensure that cryptocurrencies meet transparency standards. It will also create more barriers, and subsequently create a less than ideal environment for price increases.

On the contrary, should a cryptocurrency fail the Howey test and be considered a commodity, then the amount of possible regulation drops significantly as commodities are not held to the same standard as securities.

With this in mind, it is crucial for investors to tailor their portfolios to prioritize cryptocurrencies that are most likely to be considered commodities, as this will ensure the least amount of disruption.

Using this approach, two options come to the fore — Bitcoin (BTC 1.43%) and Ethereum (ETH 1.52%).

When asked about his thoughts on Bitcoin, SEC Chairman Gary Gensler has said on several occasions that he views Bitcoin as a commodity. This is likely due to the fact that there is no single, well-known group or person that keeps Bitcoin going, and as such it does not pass the Howey test. It really is a decentralized network, and this is the main reason why most other lawmakers happen to agree with Gensler.

But while there seems to be consensus that Bitcoin is a commodity, there is open debate as to whether the world’s second most valuable cryptocurrency, Ethereum, falls into security or commodity territory.

Surprisingly, while Gensler claims that Ethereum is a security, his counterpart at the Commodities Future Trading Commission (CFTC) believes that it meets the criteria of a commodity and is thus outside the SEC’s jurisdiction.

Whether or not this is the case will likely take more time to determine. But the main point is that there are divided opinions. This can be seen as a positive development for Ethereum.

Make a game plan today

Going forward, crypto investors in the United States should try to prioritize investing in cryptocurrencies that can be considered commodities. That makes the list relatively short since it probably only includes Bitcoin and Ethereum. But when you consider that these two make up more than 60% of the value in the entire industry and most other cryptocurrencies’ prices are correlated to them, it can actually be the most profitable strategy.

While cryptocurrencies are traded internationally and are not subject only to decisions made by regulators in the United States, there is little doubt that extensive and dramatic regulation will have a negative impact on the majority of cryptocurrency prices. Since it looks like this reality will come to fruition sooner than later, it would be advisable for investors to keep their crypto portfolios simple and prioritize investing in assets like Bitcoin and Ethereum.