Bitcoin And The Bitter Tax Bite

The taxman cometh. And the cryptos plummet.

By now you know South Korea is a prime mover for cryptocurrencies — be it up or down. This past week saw a wild ride. And lest you think changes in tax policy sow confusion only in the United States, think again.

Bitcoin breeched a key psychological barrier on news that the South Korean government would tax income earned by virtual currency exchanges to the tune of 24.2 percent. Thus, bitcoin traded below $10,000, and cryptos traded down in sympathy. This comes after the government last month said it would ban new accounts for crypto investors, and now those traders must change virtual account identifiers to real names.

Easy come, easy go, in crypto-driven enrichment. One beneficiary amid all the excitement in the digital currency space: Recode reported at the beginning of the week that Coinbase, the bitcoin exchange, made revenues of more than $1 billion last year amid heady trading volume — enough so that the company has 13 million trading accounts.

Amid the headlines, there were glimmers of hope beyond the wild pricing — as in actual use cases: real-world applications of cryptos to real-world business. The freight industry saw a milestone as the first transaction was settled in bitcoin, taking place between a Russian wheat shipper and Turkey. Crossing borders and crossing the Rubicon.

In an interview with PYMNTS, Kenneth Goodman, CTO of Hercules Tech, a data science company that structures, analyzes and models data across alternative asset classes, said he’s bearish on cryptocurrencies in the short-term and bullish on the long-term.

“I see this as a natural progression,” he said of the price action across cryptos, tantamount to “an astounding bull run through November and December” — that those who bought in December were showing negative returns on investments in January.

The market, he said, “is very retail-heavy,” and retail investors who see their portfolios drop quickly by 20 percent are likely to rush to get out. Against this backdrop, short-selling — betting that the price of something will go down — becomes attractive.

Looking longer term, “I’m not sure that bitcoin will be the cryptocurrency that we use, and I am not even sure that blockchain will be the technology that we use,” but the long-term attraction is there, he said — namely, that many users, given the opportunity, would choose a platform where they pay less for decentralized, cryptographically secure data structures. In short, they’ll embrace a trusted medium that can take on a growing number of use cases across verticals as far-flung as banks to concert venues, eliminating middlemen.

The regulatory environment, of course, is one where some countries are taking a conservative approach to regulation, and others have taken more drastic measures (we’ll leave you to guess which ones).

The U.S., he said, sports an environment where “the regulators are much smarter than I think people think they are,” and though they may not understand all the intricacies and nuances of cryptos, “they are not mathematicians … [but] they have the resource to understand it,” with renewed focus on the initial coin offering (ICO) front (where scams abound and some have no users or products in sight) and in the debate over what is and what isn’t a security threat.

Indeed, earlier this month, Ernst & Young found that more than 10 percent of the funds raised through ICOs fall prey to hacker attacks, as Reuters noted, with $400 million stolen amid $3.7 billion raised.

Looking at cryptos in general, they can be viewed in three buckets, said Goodman, as a store of value as a medium of exchange (à la bitcoin); as an asset (directly tied to a redeemable, such as an ounce of gold, with a premium in place because the cryptos are relatively easy to move) or as a token with an in-app-style purchase that can range from raffle tickets to airline tickets, where there is a store of value that has value only within a specialized ecosystem (such as, for another example, video games).

For someone in the U.S., he continued, there’s almost no reason to use cryptocurrencies across an actual use case. But for people outside the U.S., who reside in economies that might see high inflation or capital controls (with devaluation a common occurrence), then the virtual currency offers a store of value not tied to the government.

In times of strife, he said, one need not sow diamonds into a coat; they need only to remember usernames and passwords (or private keys), so they can go from place to place with all their money. In addition, cryptos offer a relatively cheaper way to send money across borders.

Which cryptocurrencies will dominate? That’s a tough question, said Goodman, as concerns regarding scalability dominate. If bitcoin can scale (where it now notably takes a long time for transactions to be completed, as the crypto is not scaled to the number of users it has) and can be secure, there’s no reason why it shouldn’t hold sway, he said. But it could come under attack, such as by governments (even as an act of war), and another currency might supplant the current crypto leader that enjoys first-mover advantage across exchanges and miners.

But, he reminded PYMNTS, bitcoin is open-source, with “no secret sauce” in place, fundamentally.

He said the short-selling aspect of the crypto market is through 2714 Poloniex, which does not allow institutional accounts, or one could do over the counter-borrowing. Both are not optimal mediums.  Kraken allows trading on margin, “but order books are thin,” he said. OTC (over the counter) trading supports few cryptos, such as bitcoin and Ethereum, among others.

As for Coinbase: Reports that they have a $1 billion revenue run rate might indeed be plausible, he said.  That’s because revenue streams come well beyond the 25 basis points to 1 percent charged as fees on fiat-to-crypto conversions. If an individual transacts directly through Coinbase, they pay several percentage points on the transaction. And through transactions done by credit card, which Goodman noted “a lot of people are doing,” the company can charge a fee as high as 4 percent. In addition, with the bull market in cryptos, they might take a transaction fee that is paid in bitcoin, and then, if bitcoin goes up by multiples, so will that attendant holding.

Headed into the weekend, might the sturm and drang of bitcoin and its digital brethren take a breath? Don’t bet on it.