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Winkler: Before investing in cryptocurrency, due diligence essential

Jake Winkler - The Journal Record

Aug 2, 2023

Nonprofits play a vital role in society working to address social and humanitarian issues. Financial stability is essential for them to fulfill their missions. To sustain their efforts, these organizations often invest assets.

Nonprofits play a vital role in society working to address social and humanitarian issues. Financial stability is essential for them to fulfill their missions. To sustain their efforts, these organizations often invest assets.

Traditionally, they leaned toward conservative investments, but the rise of cryptocurrencies has introduced a new set of possibilities and challenges.

Nonprofits invest assets to generate returns, increase financial reserves and fund initiatives. These investments are typically managed through endowments or reserves and are subject to certain legal and ethical considerations. Prudent investment strategies prioritize the preservation of capital, liquidity and diversification to minimize risks.

For decades, nonprofits have predominantly focused on traditional investment options, such as bonds, stocks, real estate and mutual funds. These relatively stable and regulated instruments have historically offered steady returns, albeit sometimes at lower rates. The emergence of cryptocurrencies has sparked interest among investors of all kinds, including nonprofits.

Cryptocurrencies, led by Bitcoin, Ethereum and other digital assets, have experienced explosive growth since their inception. The decentralized nature of cryptocurrencies, coupled with the potential for significant returns, has intrigued both individual and institutional investors. As the world witnessed some early adopters amass substantial wealth through cryptocurrencies, nonprofits began considering digital assets.

Advantages of cryptocurrency investments
1. Potential for High Returns: While their value is known for its volatility, some nonprofits have reaped significant rewards from early investments.

2. Lower Barriers to Entry: Cryptocurrency investments can be more accessible to nonprofits, enabling smaller organizations to engage in investment previously exclusive to larger endowments.

3. Tech and Innovation Alignment: Embracing cryptocurrencies can align nonprofits with technological advancements and innovative solutions, fostering an image of adaptability and relevance.

Challenges and risks
1. Volatility: Cryptocurrencies are infamous for price volatility, which can expose nonprofits to substantial financial risks, compromising their ability to fulfill missions if investments suffer significant losses.

2. Lack of Track Record: Cryptocurrencies are a relatively new investment class, making it difficult to assess their long-term performance.

3. High fraud risk: There have been several instances of multimillion-dollar frauds involving cryptocurrency. Due to the unregulated nature of these investments, any fraud resulting in a loss of funds would be a total loss if not insured.

Best practices
1. Risk Assessment: Before venturing into cryptocurrency, nonprofits should conduct thorough risk assessments and evaluate their risk tolerance. Investments should be based on clear understanding of the organization’s financial goals and long-term strategies.

2. Due Diligence: Nonprofits must thoroughly research and understand the specific cryptocurrencies they’re considering as well as the platforms or exchanges used to facilitate transactions.

3. Diversification: Cryptocurrency investments should form only a small portion of a nonprofit’s portfolio. Diversification is crucial to mitigate risks associated with this volatile asset class.

4. Seek Professional Advice: Consulting with financial advisers and legal experts well-versed in cryptocurrency regulations can help nonprofits make informed decisions and navigate any potential legal complexities.

Cryptocurrencies present both opportunities and challenges for nonprofits looking to optimize their investments. While the potential for high returns and alignment with innovation are enticing, nonprofits must exercise caution and diligence when considering cryptocurrency investments. Careful risk assessment, diversification and professional advice are essential to ensure that nonprofits can continue their invaluable work while preserving their financial stability.

Jake Winkler, CPA, is a partner at Arledge, the largest locally owned accounting firm in the Oklahoma City metropolitan area.

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