The Basics of Managing Cryptocurrency Assets in an Estate

February 04,2022 08:43 AM Comment(s) By Pablo

Sooner or later, professional trustees and probate referees will come across an estate with cryptocurrency assets.  These assets pose some challenges, not least of which is understanding the mechanics of how to buy, sell and value them.  The infrastructure around cryptocurrencies is not as developed as that for other assets (such as bank and investment accounts).  That means that documenting and accounting for cryptocurrencies involves some research.  


In the beginning of the cryptocurrency boom, investors needed some technological sophistication.  For example, with Bitcoin, one of the earliest cryptocurrencies, an investor would hold their private key in a Bitcoin "wallet."  That digital wallet would then need to be stored in a very safe place.  The news was rife at the time with stories about Bitcoin investors who lost their wallets and, consequently, all of their wildly-inflated Bitcoin fortunes.


These days, most investors go onto an exchange to buy and sell cryptocurrencies.  There are a lot of different models for these exchanges but, for the most part, individual investors create an account and the exchange manages the digital security and holds the digital wallet. The account is linkable to an individual and is typically accessed like any other account (username, password, two-factor authentication, etc.).  These exchanges are helpful to trustees and probate referees, since they operate similarly to other types of brokerage accounts (that is, they are a third party managing the funds and can be worked with just as any other financial institution).  They should work with the trustee given the appropriate documentation or court order.  The largest of these centralized exchanges are Binax and Coinbase Exchange.


There are more sophisticated trading models for hedge funds, institutional investors and very sophisticated individual investors.  If you come across one of these, your best approach is to find a financial professional with experience in these types of exchanges.  The same is true if the estate contains cryptocurrency assets that were purchased directly or held since the early days.  There are more than 1,500 cryptocurrencies and many of them are not traded on the exchanges.  These assets require special expertise and careful research to manage properly.


In terms of historical valuation of cryptocurrencies (necessary to establish value at the beginning of the accounting period), there are a lot of data sources.  For this purpose, I find that CoinMarketCap is a useful resource.  For example, here is the daily price information for Bitcoin.  There are other sources of data that are designed for investors, with hourly data and attached metadata.  These are usually accessed through APIs for modeling - for the purposes of trustees, they are confusing and overkill.


Th cryptocurrency market is evolving rapidly and the good news (for trustees and probate referees) is that as it becomes more widely established and accessed by non-technical investors, institutions and infrastructure are developing that will make it simpler to manage within an estate.


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