[header date=”18 December 2018″]Lessons learned from the collapse of Basis, bitcoin bounces back (briefly), and year-end tax tips for crypto investors.[/header]
Stable(coin) geniuses
Stablecoins are cryptocurrencies designed to maintain a constant—that is, stable—price. This is achieved either by pegging the cryptocurrency to a reserve asset, like the dollar, or through algorithms which automatically issue or buy enough of the coin to stabilize its price (in theory). You can think of the algorithmic approach as benign market manipulation.
Many cryptocurrency enthusiasts consider stablecoins the antidote to the volatility of bitcoin, which has frightened away potential users and prevented widespread adoption. With stablecoins, supporters say, crypto users would be able to transact at guaranteed prices, allowing merchants and customers to do business with confidence, and thereby encouraging broad-based use.
Algorithmic stablecoins, which are byzantine even by crypto standards, are an extension of the crypto-world’s utopian thinking. Not only would the currency itself be completely digital, but so would the rules governing its monetary policy, as it were.
So far, though, it’s not clear what benefits stablecoins offer for everyday, mainstream users over using regular old government-backed currencies. All things equal, why would Bob Smith want to use a cryptofied-dollar, or some new crypto unit, instead of his credit card or cash?
Algorithmic stablecoins were dealt a significant setback last week when Basis, the best-funded of the stablecoin projects, sputtered out because of regulatory pressures. Despite $133 million in financial backing from powerful venture capital outfits, the support of former Federal Reserve Board governor Kevin Warsh, and the Princeton pedigree of the project’s founders, not even Basis could create an algorithmic stablecoin without running afoul of US securities law. At issue were the secondary coins—called bond and share tokens—Basis planned to issue in order to buy back Basis, or encourage its expansion, to maintain its stability.
“Unfortunately, having to apply US securities regulation to the system had a serious negative impact on our ability to launch Basis,” CEO Nader Al-Naji wrote in his announcement about the project shutting down. “As regulatory guidance started to trickle out over time, our lawyers came to a consensus that there would be no way to avoid securities status for bond and share tokens (though Basis would likely be free of this characterization).”
Unlike stablecoin predecessors like NuBits and BitShares, Basis didn’t actually fail in action—it never even got started. From introduction to shut down, Basis lasted three Medium posts, or just 83 tweets. Even so, in the intervening year Al-Naji was named to Forbes 30 Under 30.
What can we learn from this footnote in venture capital-crypto history? Algorithmic stablecoin projects—if they persist—are likely to be relegated to less rigorous jurisdictions than the US. One common refrain in the cryptosphere is that the US just isn’t welcoming to innovation. But innovation either needs to work within existing rules, or work to change them.
Basis certainly won’t be the last algorithmic stablecoin, but stablecoins pegged to assets seem destined to dominate the class for the foreseeable future. —Matthew De Silva
[supplemental headline=”Market Chatter: Bitcoin’s bounce “]
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Yesterday—Dec. 17—marked exactly one year since bitcoin hit $20,000. At the time of writing, the cryptocurrency is trading for around $3,500—down more than 80% from its peak. Also yesterday, bitcoin was up 11%, its best day in nearly three weeks.
It’s difficult to pinpoint a reason for bitcoin’s rebound, although crypto media has noted a few positive developments. Coinbase has enabled crypto-to-crypto trading for retail customers, a feature that the exchange calls “Convert.” Also, president Trump recently announced Mick Mulvaney, director of the Office of Management & Budget, as acting White House chief of staff. Mulvaney has been an outspoken bitcoin supporter, even co-founding the blockchain caucus back in 2016 when he was a South Carolina congressman.
The sudden swing is a reminder that bitcoin remains unpredictable as ever, and at lower prices the cryptocurrency might be even more volatile because a single trader, or small group of traders, can influence prices more easily.
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Harvest season
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If you live in a country with a calendar-year tax reporting cycle (like the US, for example), it’s time to think about tallying up those crypto gains and—especially for this year—losses. Given the crypto market’s performance in 2018, investors may want to harvest their losses for tax write-off purposes before the year is over. (This could explain some of the recent malaise in crypto prices, in fact.)
Paying taxes on crypto can be tricky and is not always intuitive. Tax rules vary widely by jurisdiction, but we focus here on the US, which provides something of a proxy for other geographies. Three things to keep in mind:
1️⃣ There are two (somewhat) positives to losing money through trading. The first is of the educational variety—learning from that boneheaded loser trade. The second is the tax opportunity to offset other gains by locking in those boneheaded losses. But you could raise red flags by telling tax authorities about the full extent of your losses this if you haven’t recognized gains in earlier years. If you weren’t as forthcoming as you could have been, it might be time to restate previous returns.
2️⃣ It’s official: as far as the IRS is concerned, selling one crypto token for another—unloading XRP to purchase stellar or trading in and out of Tether, for example—triggers either capital gains or losses for tax purposes. There was some uncertainty about this last year, and some were hoping that so-called like-for-like transactions would provide an exemption from this requirement. But the US tax overhaul in late 2017 established that the like-for-like provision applies only for real estate transactions. If you’re in the US, crypto-for-crypto trades in 2018 have to be reported.
3️⃣ Which brings us to cost basis: now is a good time to make sure you’ve properly kept track of the difference in price between what you initially bought your crypto for and the value of your digital token when you sold it, whether that was for another virtual coin or for fiat currency. (Hard forks are another matter entirely.) In the US, gains from an investment owned for less than a year are taxed as regular income. If held for more than 12 months, it’s taxed as long-term gains at rates from 0% to 20% depending on household income. —John Detrixhe
[mailto filter=”Taxes” subject=”Taxes”]Have a crypto tax question? Let us know.[/mailto]
[supplemental headline=”De-jargonizer: Colored coins”]
A “colored coin” is a digital token—originally conceived to be a fraction of a bitcoin—that represents a claim to a real-world asset. In short, it’s a way to track ownership of items from the living, breathing world (eg, stocks, diamonds, corn) on a public, distributed, verifiable ledger.
In 2015, Arthur Breitman, cofounder of Tezos, wrote of colored coins: “The asset can only be tracked on the blockchain insofar as its physical custodians, or the relevant authorities, agree to recognize the legitimacy of the colored coin. The mere technological ability to track an asset, from common stocks to parcels of land, does not magically translate into the ability to form an authoritative record of ownership.”
Since people can now create their own tokens on the ethereum network, bitcoin-based colored coins aren’t really practical. However, they served as the inspiration for a new mode of digital record keeping, which is slowly evolving.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
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Please send news, tips, and technicolor tokens 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 John Detrixhe, and edited by Oliver Staley and Jason Karaian. A good traveler has no fixed plans and is not intent on arriving.