Bitcoin Drop, Taxes and Opportunity

Source: Coinbase

The price of Bitcoin in US dollars dropped around 36% at one point just over the last week. The actual percentages and where one measures them from is not the critical point. Bitcoin has had a sudden reversal of fortune despite the mathematical certainty of its supply. Any explanations must focus on demand.

Many demand reasons have been offered for this sudden loss of altitude. Let’s pick three:

  1. A chartist would point to the lovely head and shoulders pattern traced out in the three month chart (source, select 3m).
  2. Someone who doesn’t understand China or the uncensorable nature of Bitcoin might focus on the ban, the latest in a long and frequent series of bans, from the Middle Kingdom.
  3. An Elon Musk fan (he was responsible for something like a 33% pop in ratings for SNL, after all) might point to the announcement that Tesla was no longer accepting Bitcoin for new cars.

But these sort of stories are always floating around. They gain credence and retweets when the price of Bitcoin cooperates but there is a large “tail wagging the dog” component if one looks closely enough.

The chartist story is just that, a story. The head’s peak is around $63k and our latest “failure to surmount that peak” completes the classic pattern. But, the story is just an attempt to find a pattern in the chaos. Mankind has been doing this with constellations since the dawn of time. If it helps you organize your thoughts and make sense of the past, there’s no harm. But as a predictive tool, it is hard to put much store in the alchemy/astrology of chart divining.

China has banned Bitcoin again. China regularly bans Bitcoin. If China has ever unbanned Bitcoin, it has failed to gain much notice. Bitcoin is big in China because certain connected people can tap into sources of very cheap (and often very dirty) electricity, one of the key components of mining profitability. It’s also not shocking that Bitcoin, a globally accepted store of value that is immune to the whims of a country run by a Communist Party, would have a natural fan base in China.

And finally, the story that Tesla is not accepting Bitcoin for new cars because of the environmental impact of mining is a red herring. Tesla did not accumulate $1.5bn of Bitcoin to facilitate trading in the underserved sub-economy of Bitcoin vs. electric cars that was just waiting for Elon Musk’s blessing to flourish. Elon Musk accumulated Bitcoin because he prefers to hold excess balances in Bitcoin rather than US dollars. A holder of Bitcoin who fancies a new Tesla would incur the same tax liability from selling the Bitcoin to buy a Tesla as trading the Bitcoin directly for a Tesla (as a public company, the Bitcoin transaction would be well reported). Unless Tesla was willing to offer a tempting discount for Bitcoin transactions to clear excess inventory, there is nothing compelling to the transaction for the prospective Tesla buyer. So sure, the company that helps drive demand for rare earth mining globally is worried about the electricity used to mine Bitcoin.

For a more substantial story, let’s look at COVID delayed Tax Day of May 17th. The intersection of people who regularly stash some of their savings in Bitcoin (stacking sats, in the vernacular) with those who trade crypto currencies at exchanges that report to the IRS and/or receive compensation through contract work is not insignificant. The latter activities result in “1099” income that is both taxable and not withheld at source. It is reasonable to assume that Tax Day obligations resulted in some price insensitive selling of Bitcoin. There’s alot of daily trading in Bitcoin, but very little of it is directional. It would not take much motivated selling of Bitcoin to send the market makers (aka liquidity providers) scrambling for the sidelines.

Does that mean Bitcoin will snap back up to previous heights now that we are past the dreaded Tax Day? Perhaps. But that would not be in line with the way that investors react to sudden price drops. For the speculators with excess dollars to deploy, the fear of “catching a falling knife” is greater than the potential pleasure of picking up a valuable asset at a substantial discount to recent highs.

It is more likely that market moving on balance demand for Bitcoin will accrue slowly via the same people who sold to meet their tax bills. This cohort will continue to “stack satoshis” as part of their longer term financial planning.

If we are right about this dynamic, then the market is ready for a product that would allow one to stake, rather than sell, Bitcoin and dynamically draw down chunks of dollars as needed. The mechanism in banking is called a line of credit. And that mechanism can be created with Bitcoin as a funding asset and mobilized within the regular banking system.

A Bitcoin Line of Credit product would allow the smaller holders of Bitcoin (10–100, say) to maintain and build their balances in Bitcoin while being able to meet lumpy US dollar expenses without selling the underlying Bitcoin. A line of credit would allow this cohort to avoid reducing exposure to Bitcoin and creating unnecessary tax events.

If you want to find out more, come visit us here.

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Tradition finance guy looking to use new tools to remake the financial landscape

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John Crossman

John Crossman

Tradition finance guy looking to use new tools to remake the financial landscape

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