[header date=”27 November 2018″]Will the cryptocurrency industry recover after bitcoin’s most recent tumble? Nvidia falls and Ohio gears up to accept bitcoin for taxes.[/header]
Rethinking assumptions
Since 2017’s bull-market euphoria, there’s been a widespread belief that the cryptocurrency industry is here to stay—that exchanges will become as commonplace and buttoned-up as banks, and that cryptocurrency will become a mainstream asset class.
Now, none of that looks assured as bitcoin’s November collapse continues.
At the start of this month, bitcoin traded for $6,300 and now, it’s trading for just $3,700—a 40% drop which will have ramifications for the rest of the industry. As bitcoin’s price plunges further, here are just a few areas of concern:
What will happen to cryptocurrency exchanges?
Just last month, Coinbase raised money in an investment round that valued the startup at $8 billion. Although investors and employees would love to cash out their equity through an IPO, it’s fair to wonder what cashflows the exchange can generate. With declining active user numbers and thereby diminishing revenue from trading fees, what is Coinbase—or for that matter, any exchange—really worth? The volume of crypto trade seems a lot lower than what it was during last year’s mania, so perhaps exchange valuations should be lower, too. With bitcoin trading below $4,000, it seems that Coinbase (and other exchanges) will remain private for a while longer.
What will happen to exchange expansion plans?
Because exchange revenues depend on bitcoin’s price, companies may falter in their international growth strategy. Hiring sprees and office openings are not cheap, so it wouldn’t be surprising if bourses cut back on global growth in the immediate future. Recently announced exchanges (and crypto projects) may fail to launch, or even disappear.
What will happen to mining pools?
The price of bitcoin is critical to mining, the lifeblood of the crypto community. As the price falls, the energy costs of mining could exceed the block reward, or the bitcoins earned for confirming transactions (currently, miners receive 12.5 bitcoins for each block they find). Because energy costs vary, there’s no universal breakeven price, but if bitcoin’s freefall continues, miners may abandon the activity to avoid losing money.
What will happen to miner manufacturers?
Bitmain and Ebang—two Chinese manufacturers of specialized mining computers—are expected to delay Hong Kong IPOs (yet another sign that crypto’s infrastructure companies aren’t on sturdy ground). Considering that Bitmain also operates mining pools, the shockwave from bitcoin’s fall could be even worse.
The Amazon example
Even as the crypto industry grapples with the reality of bitcoin falling below $4,000, some investors see a way out. Fred Wilson, cofounder of Union Square Ventures (a VC firm with an extensive blockchain portfolio) boldly compared the recent drawback to Amazon’s turmoil after the dotcom bubble burst in 2001.
“I think some crypto asset (and possibly a number of crypto assets) will have a price chart like Amazon’s current one in 18 years,” he said in a blog post. “But we will have to do what Amazon did, hunker down and build value and survive, for quite a while to get there.”
While I’d leave the door open for the possibility he’s right, there are reasons to question Wilson’s analogy. Amazon today is fundamentally different from what it was a couple decades ago. Warren Buffett passed on investing back when Jeff Bezos just wanted to sell books over the internet.
In the same way that bitcoin exploded upward due to a powerful positive feedback loop, a negative loop could have a catastrophic effect on the cryptocurrency industry. Wilson concedes “I think things will get worse before they get better.” Although bitcoin seems like an unstoppable technology, maybe it’s time to reconsider whether the accompanying cryptocurrency industry is here to stay. —Matthew De Silva
[supplemental headline=”Market Chatter: Turning gold into lead”]
There’s an old adage about the California gold rush that the real money wasn’t made in mining, but in selling miners their shovels. Sam Brannan began selling mining equipment before becoming California’s first millionaire by speculating in real estate and Levi Strauss got his start with a wholesale dry goods store that became the foundation of a blue jeans empire.
The manufacturers of crypto mining equipment have also profited handsomely by selling to miners during the boom—chipmaker Nvidia’s shares gained nearly 100% in 2017—but unlike their 19th century counterparts, they’re struggling to manage the bust. On Nov. 15, Nvidia said its fourth-quarter revenue will be more than half a billion dollars shy of analyst estimates, as demand from miners dried up and the company was stuck with excess inventory. Different versions of the same story are being told by AMD and Micron, semiconductor chip makers with varying degrees of exposure to crypto mining. The PHLX semiconductor index is down 14% in the last three months.
[img src=”https://cms.qz.com/wp-content/uploads/2018/11/atlas_Sk0cPe507@2x.png”]
The good news is that at least one analyst—Citron Research—has called a bottom in Nvidia’s decline, and the stock is now ticking up again. It has a long way to go.
Chip makers offered an attractive option for investors looking to cash in on the crypto boom without having to sully their hands with buying actual crypto coins. But now their shareholders are suffering the same agita as bitcoin owners. — Oliver Staley
[/supplemental]
Ohio’s bitcoin bamboozle
Ohio businesses can now use bitcoin to pay their taxes—sort of. Beginning this week, the state announced it will become the first in the nation to accept bitcoin for tax payments. Although crypto enthusiasts celebrated the announcement as a sign of government adoption, its reality is underwhelming, and potentially even worrisome.
For starters, the Buckeye state won’t actually collect the bitcoin. Instead, taxpayers will send it to BitPay, a payments processor in Atlanta, which will convert the bitcoin to dollars for the state treasurer’s office. “At no point will the Treasurer’s office hold cryptocurrency,” says Ohio’s crypto tax payment portal, which launched on Monday.
So bitcoin just functions as an intermediate unit of account, while BitPay—the payments processor—collects a 1% transaction fee from the taxpayer.
“This is not actual adoption,” wrote one commenter on the cryptocurrency subreddit. “Ohio itself does not see or touch or even know about bitcoins.” Others raised questions, like whether selling bitcoin to pay taxes is itself a taxable event. (Under federal tax laws, it seems to be.)
The state’s treasurer, Josh Mandel, told Quartz the 1% transaction fee charged by BitPay is less than the 2.5% fee Ohio’s taxpayers face when using a credit card. That’s true, but Ohio’s taxpayers can also pay their taxes without any fees by using a check or electronic transfer (and without triggering additional taxes from the sale of bitcoin).
Comparing the usage of credit—or debt—to an asset (even one as strange as bitcoin) is just flawed logic. No one wants to pay more taxes than necessary, so even a bitcoin owner should sell it on their own and then use one of the free payment methods.
There are other reasons to be concerned. In Canada, fraudsters have stolen hundreds of thousands of dollars through bitcoin tax collection scams, so Ohio’s decision to accept bitcoin for taxes—even indirectly—could create confusion and put its taxpayers at risk of being targeted by con artists.
Ari Lewis, cryptocurrency advisor to the Ohio Treasurer’s Office, told Quartz he wasn’t familiar with the bitcoin tax collection scams that have plagued the Canadian Revenue Agency. “I don’t see that as a cryptocurrency-specific issue,” Lewis said, suggesting such scams could be perpetrated through other payments processors, too (the key difference is that bitcoin transactions are irreversible).
Finally, when pressed for details about how many businesses have expressed interest in paying taxes in bitcoin, the Ohio Treasurer’s Office said that information wouldn’t be available for several months. Ohio’s new payment option seems like a solution in search of a problem and one driven less by a desire to serve taxpayers, and more about grabbing some of the sizzle that comes with all things crypto and blockchain.
Paying taxes with bitcoin is a convoluted, more expensive, potentially unsafe, and unnecessary process. It’s not clear whether anybody wants to—or should—do it in the first place. —Matthew De Silva
[mailto filter=”Buckeye” subject=”Buckeye Bitcoin”]Would you pay your taxes in bitcoin?[/mailto]
[supplemental headline=”De-jargonizer: Mining Pool”]
A “mining pool” is a formally organized group of cryptocurrency miners who join their computing resources to confirm transactions on a cryptocurrency network. They choose to do this to increase the likelihood of earning a block reward (the more hash power you have, the higher the chance that you’ll confirm a block and thereby earn more units of the associated cryptocurrency). Miners in mining pools agree to split block rewards among themselves, and usually pay a small fee to the organizer of the pool. It might be easiest to think of joining a mining pool like joining an office lottery pool. You sacrifice a share of the potential share of the rewards, but significantly increase your odds of winning.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
[/supplemental]
Please send news, tips, and buckeyes to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva and Oliver Staley, and edited by Oliver Staley. The only thing that hurts more than paying an income tax is not having to pay an income tax.