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Digital currencies are all the rage in 2017. A decade ago these assets did not exist. Five years ago, they were a novelty for a few. Last year, cryptocurrencies began to get some press, and in early 2017 the infamous Winklevoss twins unsuccessfully attempted to convince the SEC to allow them to open a Bitcoin ETF product on the equity exchange.

Those poor Winklevoss twins seem to always come up on the short side of things when it comes to gratifying their collective egos. While they have hundreds of millions, they had to fight for in the court from the wildly successful Facebook (NASDAQ:FB); the twins argued it the company's technology was their idea at Harvard and not Marc Zuckerberg's. The twins settled with the enterprise, but they lost out on the billions in wealth the company created.

This year, the twins were all ready to go when it came to an ETF product to make trading Bitcoin a lot easier for market participants. After they had been turned down, the price of the digital currency exploded higher. The Winklevoss twins are two very smart cookies, they have been at the starting gate for two assets that have taken off beyond anyone's wildest dreams. However, while the two millennials have profited and now have enough assets to lead a privileged existence for the rest of their lives, they must feel jinxed. Facebook billions slipped through their fingers, and the SEC stood in the way of their Bitcoin ETF just a few short months before the price of the asset exploded to the upside.

Huge gains during the first six months of 2017

At the end of 2016, Bitcoin was trading at $986, and many analysts believed the price was at a bubble level. After all, in 2010, the price of the cryptocurrency was at 6 cents. At the same time, the price of Ethereum ended 2016 at around the $8 level. Source: Bitcoin Price Index - Real-time Bitcoin Price Charts

In June, Bitcoin traded to a high of $3018.54, more than triple the price six months earlier and an astronomical gain since 2010. Source: Bitcoin Price Index - Real-time Bitcoin Price Charts

Ethereum peaked at $370.25 on the day that Bitcoin traded to its most recent high, over forty-six times the price at the end of 2016.

On Wednesday, July 5 Bitcoin was at around $2600, and Ethereum was $270, both digital currencies are still at lofty levels. These cryptocurrencies have been gaining acceptance by many around the world as they are a global means exchange where bids and offers in the market determine their values. Moreover, they fly below the radar of the central banks, monetary authorities, supranational financial organizations, and regulatory bodies of the world.

Are Bitcoin and Ethereum commodities or currencies?

Bitcoin, Ethereum, and other digital currencies have attracted lots of attention from people all over the globe as well as central banks who seek to monitor money supply. These assets operate like currency as they have applications as a means of exchange. However, they are not easy to fit into any traditional asset class. Cryptocurrencies are not stocks or debt instruments. They have some of the properties of currencies like the dollar, euro, yen, RMB, or other world currencies but there are many differences. Central banks and governments do not issue them, and they are far more volatile than fiat currencies. Given the price action and value appreciation over recent months, the only assets that can compare when it comes to price variance are commodities as raw materials prices have a long history of doubling or more in value or halving in short periods. However, Bitcoin and Ethereum's volatility makes commodities prices seem tame by comparison.

Defining digital currencies in an asset class vertical is not an easy task, but one regulator in the United States has attempted to take control of the market or at least to monitor the new market.

The CFTC defines the assets

In 2016, the Commodities Futures Trading Commission (CFTC) identified digital currencies as commodities. Their action was more an attempt to understand the new asset class rather than an effort to control the cryptocurrencies. When the Winklevoss twins approached the Securities and Exchange Commission (SEC) to list a Bitcoin EFT product, the SEC had a difficult time with the product. Regulating and controlling digital currencies would be like riding a psychotic horse through a burning barn these days given the price variance and secretive nature that is the overriding factor that has attracted so many to the market. Additionally, it has been the price action that has fostered the growth of these digital currency assets over recent months. After all, everyone loves a bull market, and when it comes to Bitcoin and Ethereum, there are few comparisons these days and even on a historical level for the appreciation.

In early 2017, under the leadership of acting CFTC Chairman J. Christopher Giancarlo, the agency set up Lab CFTC to "promote responsible FinTech innovation and fair competition for the benefit of the American public. LabCFTC is designed to be the hub for the agency's engagement with the FinTech innovation community." The initiative has given the CFTC a chance to study blockchain technology, high-frequency trading, and digital currencies in a lab environment. As other regulators in the U.S. and around the world have had a difficult time putting their hands around digital currencies and financial technology, the CFTC has carved out an area under their umbrella to plant the seeds of regulation. While many regulators and governments are quietly studying and pondering the impact of financial technology these days, the Commodities Futures Trading Commission is doing something about the new asset class. The CFTC may be in the best position to understand digital currencies as the most volatile and highly-leveraged assets in the world fall under their purview.

Tax issues for U.S. citizens

One of the issues that face those active in the digital currency markets in the United States is taxation on profits and losses when participating in Bitcoin and Ethereum these days. I recently came across an interesting article on the tax treatment for Bitcoin published on a website called "Taxes For Expats." The article outlines some of the important issues facing those active in the new market and could serve as a good ready-reference when it comes to taxation. In the volatile digital currency markets, that regulators continue to struggle with these days, anyone trading or investing in these assets need to understand the tax ramifications of their activities.

Bubble markets, but the technological age means these assets are here to stay

The price action in both Bitcoin and Ethereum has been nothing short of a classic bubble. There may have never been a bubble quite like the one going on in digital currencies. The only comparison that is even close is to the tulip bulb mania that gripped the Netherlands back in the 1600s, but the utility of digital currencies makes for a weak contrast.

We are living in the age of technology. At 57 years old, it is unbelievable to me the changes I have seen over the span of my lifetime. Innovation has made so many things that I grew up with obsolete. The library I studied in throughout my school days can now be accessed through a smartphone in my back pocket. There are too many examples of how technology has changed our lives to list in this short article.

Technology has made our lives easier, but government institutions are struggling to keep up with the innovations that appear on almost a daily basis these days. When it comes to the world of digital currencies and Fintech, as the CFTC has labeled it, understanding tax ramifications and the potential for regulation could influence the prices of these assets in the future. Digital currencies and blockchain technology is here to stay. Many people of my generation were late to the computer revolution that took place in the 1980s. It is likely that Bitcoin, Ethereum, and other digital forms of currency instruments will grow in acceptance in the years ahead. Those who write this sector of the financial market off as a scam or Ponzi scheme these days are likely to be using these instruments in the years to come. Meanwhile, keep your eyes on those Winklevoss twins; they seem to always be on the cusp of the next billion dollar idea.

Each Wednesday I provide subscribers with a detailed report on the major commodity sectors covering over 30 individual commodity markets, most of which trade on U.S. futures markets. The report will give an up, down or neutral call on these markets for the coming week and will outline the technical and fundamental state of each market. At times, I will make recommendations for risk positions in the ETF and ETN markets as well as in commodity equities and related options. You can sign up for The Hecht Commodity Report on the Seeking Alpha Marketplace page.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Read more:
Bitcoin - History, Regulation, And Taxes - Seeking Alpha