Analysis

Are There Any Reasons to Believe in the Future of Crypto (Yes!)

Predicting the price of bitcoin is a game for suckers but it’s hard not to be cautiously optimistic this January.

Since its spectacular swan dive down to $3200 on December 16th, bitcoin has recovered to $4000 USD, or a 25% increase in less than one month.

If it manages to stay above $3700 for January, that would be the first monthly gain for bitcoin since July.

While a 25% jump is not much to cheer after a drop of 75%, a mediocre January is somewhat bullish.

Traditionally, bitcoin goes down in January (average 16% drop) but recovers in February:

The traditional explanation for the slump is that late January/early February is the beginning of Chinese New Year, so you have the Asian version of the North America saying, “Sell in May and go away.”
It’s not just the Chinese either, many Asian cultures celebrate the Lunar New Year or spring festival including Indonesia, Malaysia, Thailand, and Vietnam,
Because the official start date of the Lunar New Year varies from year-to-year, I encourage people to read the Wikipedia article on the subject.
Taxation on Crypto
It’s hard to underestimate the impact of taxation as a downward force on the bitcoin in 2018.
The return on investment of more than 1000% meant that any sales of bitcoin were subject to at least capital gains tax
But not all countries treated bitcoin appreciation as capital gains. Some treated it as income with mandatory payroll taxes thrown on top.
Fortunately, in the US, bitcoin is treated as property. Up to the $3000 in losses in bitcoin trading can be written off against ordinary income.

For many North American retail investors, it just made good tax sense to dump bitcoin and other crypto at the end of the year.

Murky tax laws in other countries meant that in most cases, it was necessary and prudent to sell and make sure you had enough cash in hand to pay off the local tax authorities.

What’s the Big Deal Anyways?

Media coverage of crypto is vastly of out-of-proportion to it’s impact on the world financial markets.

Take the market cap of bitcoin. It’s currently near $70 billion USD. In 2017, it reached a high of $240 billion.

In one year, it lost $170 billion of market cap but so what?

In less than three months, $400 billion was wiped off the market cap of Apple, going from $1.14 trillion down to $740 billion.

And how about General Electric? In December of 2016, it had a market cap of $270 billion (higher than bitcoin). In January of 2018, the market is $70 billion, about the same as bitcoin.

Even at its peak, bitcoin had a market cap only slightly bigger than Nestle, which ranks #20 on the list of biggest public companies in the world.

But now? The 100th publicly-ranked company in the world, Salesforce, has a bigger market cap than bitcoin at present ($97 billion versus $70 billion).

Despite all the hype of the last eighteen months, very few investors ever bought bitcoin. It’s still a very exotic financial instrument that is not of interest to most of the world’s wealthy elite.

For example, there are 36 million millionaires in the world, but only slightly more than 17 million bitcoins in circulation.

What Does the Future Hold?

As I said before, predicting the price of bitcoin is a mug’s game. But it’s hard to think of reasons why bitcoin should go down (even more than it has).

Perhaps the biggest surprise of 2018 for crypto was the utter lack of technological advances made by any coins or token in the crypto-space.

Bitcoin only had one upgrade of moderate significance. Ethereum had NONE.

None of the major crypto-startups delivered on any promises that were made to investors in return for equity. Bitcoin Cash in particular had a “software upgrade” or hard fork that was disastrous.

It should be a different story in 2019, as both bitcoin and Ethereum are set up to undergo major changes. I will talk about that in my next article.

DJ

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