Crypto Warning

In this article, I am specifically referring to cryptocurrencies – blockchains that seek to facilitate financial transactions and potentially replace traditional money. This is a separate topic from blockchains that provide other uses, which I may address separately at another time.

We are currently in the mania phase of a bubble. People who don’t understand blockchain technology are now pouring in their savings, maxing credit cards, and supposedly taking out mortgages to buy crypto currencies. This will not end well for those who don’t get out early enough. All they see is that the value of something is going up quickly and they want to jump on board with the hope that it will go up some more and they can sell for a quick profit. Maybe they will make a quick profit, but eventually, regular people are going to stop buying and this will collapse and ruin the bigger fools/bagholders.

I’ll explain why I don’t believe purchasing crypto assets at this point and at these prices is a good idea.

I am not going to give a super detailed explanation of blockchains. If you aren’t already aware of them or buying them or own them, just do your best to ignore the hype. If you do own crypto assets, I hope after reading this you will strongly consider cashing in and not spread hype.

Money?

Bitcoin is supposed to be like money. While it technically is capable of tracking transactions, it has some technical limitations that would prevent it from replacing the dollar or any major currency. Simply put, it doesn’t scale well and would never be able to replace even Mastercard at the scale that Mastercard operates. Mastercard handles ~500x more transactions per day than Bitcoin – and Mastercard’s transactions are real-world purchases. Not speculative trades.

These limitations are well known among those who understand blockchain. This is a big reason why there are “altcoins” – other blockchain projects that improve on Bitcoin’s shortcomings. No, I don’t recommend buying any of them at these prices either.

So, even if there is a new blockchain that comes out that can scale to replace a major currency like the dollar, why won’t it displace major currencies?

INTERNAL REVENUE SERVICE

It varies from country to country, but in the US, Bitcoin and other crypto assets are treated as property by the IRS. And a more detailed PDF. Please read the PDF and not just my bullet points.

  1. If you receive crypto as a payment for goods and services, you must compute what the dollar equivalent value was at the time you received it for your tax purposes. Warning: This means that if you choose to hold this crypto, you run the risk of price fluctuations (like a crash) making it so you can’t afford to pay the taxes you owe the IRS on 4/15/2018.
  2. You must report the gain or loss of the crypto you spend. If you use your cryptocurrency to buy a coffee, it is your responsibility to calculate how much that particular $3 worth of crypto was worth when you acquired that crypto and note how much it is worth now. You will then have to report this to the IRS at tax time and you will owe income tax or long-term capital gains tax on this transaction if your crypto went up in value since you acquired it.

Are you willing to report to the IRS every single transaction you do? This is a laborious task.

Are you interested in paying capital gains or income taxes on each of those same transactions?

What percentage of your real-world transactions today are made in cryptocurrencies? Be honest.

It’s not Bitcoin’s fault that the IRS has chosen to handle cryptocurrency exchanges like this. Just like it isn’t gold’s fault that it is treated similarly.

However, both gold and cryptocurrencies will never be money in the United States or in countries that choose to handle them in this way.

The case for cryptocurrencies having value is that they will displace traditional currencies in everyday use. Since it is clear that they will not (unless the government changes their rules), what case is there for astronomical values?

Public Ledgers

You might be thinking, “Well, I’ll just run my money through an altcoin like Monero that has anonymous transactions.” That’s a great idea if you want to go to prison for felony money laundering and tax evasion.

If you use dollars to buy Bitcoin in any significant quantity, odds are your identity is known and associated with that Bitcoin purchase. Major exchanges such as GDAX, Bittrex, etc., require you to provide your identity to them. It is similar to opening a bank account, and they track your transactions. If you then use Bitcoin from one of those wallets to purchase Monero, there is a clear record that you bought Monero. Sure, from that point forward the picture gets cloudy for the IRS. However, when the IRS catches up, they are going to inform you that you owe them tax on the Bitcoin transaction and ask you what happened after you bought Monero.

Many of these blockchains are public ledgers. This means every Bitcoin transaction since day one is available on the internet for all to see for all time. If you think the FBI, NSA, IRS, and other governments aren’t building (or already have) tools that map these technologies and cross-reference with known Bitcoin owners, you are naive and it will very possibly catch up with you.

Can you think of some types of transactions you might do that you don’t want to tell the IRS about? If the list of names and wallets gets leaked at some point do you want everyone to see who you paid or how much you were paid?

Misinformed pundits like to say that Bitcoin is useful for illegal acts like buying drugs. The truth is, Bitcoin is terrible for that. It is a public ledger. While it is true that right now, a layperson can’t easily see real names associated with wallets, that is already probably not true for governments. Don’t forget, Bitcoin and many other altcoin ledgers are public forever. So, if at any point in the future there is a major leak, like if Coinbase were to get hacked, odds are many people’s transactions will be fully public knowledge. Not good for anyone conducting illegal activities.

Crowded Exits

There are many other headwinds for Bitcoin and altcoins, but I’ll leave it just at the fact that they can’t be money today, which undermines the main story of their value.

I have dabbled in crypto over the years. First briefly when Bitcoin was new (I mined/sold at $20…) and then more recently again in the early phases of this big run-up. Seeing the real world applications you can do through Ethereum got me excited again. But now the prices are truly insane and I cashed in a few weeks ago. I do plan on shorting Bitcoin when options are available on the futures.

When I cashed in, I noticed it took awhile for everything to settle. Selling my altcoins in exchange for Bitcoin on one exchange, and then transferring the Bitcoin from that exchange to another exchange where I can actually withdraw cash took a good 30-45 minutes. Most of that time was waiting for the Bitcoin transaction to verify. And that was on a good day.

When the latecomers stop buying and Bitcoin and altcoins lose their steam, this will probably be an epic crash. A lot can happen in that 30-45 minutes of waiting for transactions to clear. There will be people who watch the crypto crash evaporate 50%, 60%, 90% of their money while they are helpless.

If you currently own crypto assets I strongly recommend you consider cashing in. If you are up big, listen to John Goodman:

P.S. I am not saying that blockchain technology is worthless. In fact, I believe it will serve many useful purposes and will be with us for a long time. I am just saying that it can’t be money unless governments allow it Also, the blockchains that perform real uses such as decentralized serverless cloud services, track ownership of assets/sharing economy, track supply chains, etc. need to be valued based on what they actually do – perhaps compared to companies that offer these services today. For example, how much is AWS or Azure worth? What prices do they charge? How much volume do they handle? Compare that to the market cap of Ethereum. Does the value make sense? Maybe someday it will, but not at today’s prices – just like buying dot com stocks in 2000.

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