A Crypto Christmas

Shakespeare once observed there is no misery like seeing happiness through another man’s eyes. When that happiness could have easily been yours, there’s only regret with whom to commiserate. And his company is a misery all its own.

I still recall the conversation like it was eight years ago; which is precisely when it was. I was talking with a man I had met through work—an earnest poindexter whose nerdy, intellectual guilelessness makes him far more interesting and lovable than his lack of social agility might indicate. He asked me out of the blue: Have you ever heard of bitcoin?

That was an easy answer: Nope.

He was clearly enthused. You should look into it. I think it’s going to eventually become very big.

It was only about sometime last month that I pledged to never again take this man’s advice lightly.

What’s a bit more excruciating is that I didn’t take his advice all that lightly then either. He made a compelling case for these so-called “bit-coins,” and I was convinced. They were priced in the low single digits at the time and I could spare a significant investment sortie on such a unique long-term runner. So I decided to buy it and forget about it. Unfortunately I forgot about it before buying it. He’s too nice of a guy to frequently remind me.

Of course bitcoin is now slightly appreciated over my original $3 entry point. Though that’s not to assert with much conviction it won’t return there again by next Wednesday. And that’s just the first of several reasons why bankruptcy attorneys may become bitcoin’s staunchest advocates. Here are a few others…

Volatility
Yesterday bitcoin fluctuated $5,000. It has fallen by over 80% three previous times. If its inherent utility is as an alternative currency (and yes I am aware of bitcoin cash), then it will remain unsuitable for that purpose so long as holders don’t know whether their current balance will purchase a Porsche or a pineapple. Imagine Amazon trying to price in bitcoin: it would require real-time pricing and settlement functionality to prevent dramatic over or underpayment in periods of extreme volatility—which is to say always. Currency requires consistency—or at least predictability.

Taxes
Did you know the IRS has ruled that every bitcoin transaction represents a taxable event? Not just investment entry and exit. Everything. This would be like having to record and report a dollar cost and sales basis every time you bought a hamburger. With failure to do so exposing you to criminal evasion charges. This alone represents the type of intractable friction that destroys a currency use case. Many people may not bother with tax reporting, and block chain’s inherent anonymity features may offer sufficient obfuscation to do so. But, prostitutes and drug dealers aside, prudent professionals don’t expose themselves to such legal jeopardy. Which means using bitcoin for anything but speculation is a real Schedule D hassle.

As an aside on this topic, there exists real potential for a severe tax trap on soon-to-be-homeless bitcoin investors. That because of the disparate way capital gains and losses are subject to tax reporting. Specifically, capital gains are fully taxable in the year they are realized. In contrast, capital losses can only offset $3,000 of income, with any remainder carried over to future periods.

Let me give you an example of how badly this can damage the unwary. Imagine a hate-investor made a million dollar gain during the massive 2017 crypto explosion, and cashed out yesterday to enjoy his fruits over Christmas. He now owes the IRS several hundred thousand dollars in gains taxes.

But that’s a problem for later. For now, he guzzles Dom Perignon over Christmas and then reinvests his million dollars in bitcoin on January 1. Unfortunately, it promptly plunges by 75% leaving him only $250,000. Ahh well, that’s still a quarter-mill he didn’t have a year earlier. No big deal. Until April 15, that is. Because now he owes the IRS $350,000+ on his subsequently dissolved 2017 gains. But he only has $250,000 of bitcoin left. Which means he’s now writing a check for more money than he actually has. And that’s a suboptimal financial outcome.

Though if it’s any consolation, in 2018 he can deduct $3,000 of his $750,000 loss and then carry over the remaining $747,000 into future periods. Which means he can capture the full value of that deduction in only 250 years. Maybe he should begin a regimen of ginseng tablets immediately.

Governments
Few governments take an ecumenical perspective on their monopolies. And fiat monopolies are the most lucrative of all. Bitcoin has thus far been left unmolested by governments because it is still a tiny market with very little broad saturation. But it would require breathtaking investor optimism to imagine the state would tolerate mass proliferation of a cash alternative. That would be to cede an enormous amount of economic power to the citizenry. And what respectable politician would allow that?

The Keys to Happiness
So what happens to the money in your bank if you lose your account number? Nothing really. Nothing irretrievable happens if you lose your brokerage password or real estate deed either. And if someone steals your credit card information? You may be out $50. But what happens if your private crypto keys are lost or stolen? The answer is: you lose everything. And there’s no FDIC insurance.

Here’s a few names interested readers can research for famous bitcoin blunders and heists: Mt. Gox, Bitfinex, Bitcoin7, Linode, Bitcoinica, Bitfloor, and Mintpal.

Of course there have been thefts in all form of financial instruments, but unlike mainstream vehicles crypto has no layers of institutional resiliency or regulatory oversight. Do these exchanges follow established formats for SDLC, secure coding, or change management? No one knows, and they aren’t telling. There’s no net below investors in this industry. Which means one mistake is fatal.

The Thesis
Those items may or may not be sufficient for readers to pause before plunging. Though there is one significant reason to ignore them all and proceed to put a few bits in your own Christmas stocking. That reason is with Bitcoin the thefts are disorderly rather than systematic. And in the difference is everything.

As almost certainly you know already, the dollars in your bank are being stolen every day, no matter what your account balance may indicate. Just because the explicit numbers haven’t declined, doesn’t mean the implicit value hasn’t. Inflation is absolutely the most palatable tax for politicians, because it does its work in such professional silence. The government doesn’t even have to overtly tax at all to operate. It could simply print the necessary cash for its operations, as was precisely the case with Quantitative Easing. But do you think that would be getting Government for free?

Bitcoin allows its holders to avoid the inflation tax. There can only be 21 million bitcoins ever. Their value can not be shaved like fiat currencies. In fact their value is almost mathematically certain to increase as supply remains capped while the universe of goods and services they could be used to purchase theoretically expands forever. In an equilibrium scenario, the value of bitcoins would increase or decrease in sympathy with the underlying world economy.

So if the 79 trillion dollar global economy (as of 2017) were exclusively priced in terms of 21 million bitcoins, that would put the fair value of 1 BTC at approximately $3.8 million. This being the price target I am going to go ahead and call for by mid 2018. I just have to remember where I put that thumb drive with my keys.

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41 thoughts on “A Crypto Christmas

  1. Thanks for sharing the personal experience, but I’ll stick with gold.
    The conceptual advantage is interesting and rational but,
    at my age, I lean towards the proven track record.

  2. Is there any way of getting crypto into an IRA to keep the IRS temporarily at bay?
    Thanks for your shared wisdom in 2017, Porter, and Merry Christmas

    • You’ll need a self-directed IRA. But once you’ve established that crypto is a permissible investment. Here’s one primer among many.

      By the way, I recently talked crypto with the same guy who originally recommended bitcoin to me years ago. Etherium is by far his favorite in the space presently, followed by bitcoin cash.

      Merry Christmas.

  3. Pingback: A Crypto Christmas | Reaction Times

  4. There’s one key element of bitcoin supply I neglected to mention: that being the supply of non-bitcoins. While BTC is limited to 21 million, the supply of potential blockchain competitors is infinite. Obviously there are already several. And there is no governing authority to say “this and no others.”

    Thus it could very well be the case that blockchain technology destroys all of its children. I say this not out of clairvoyance, but rather the hope that no readers lose significant wealth in a swoon.

    Merry Christmas to you all.

  5. I put money into it a few weeks ago. Not anything I can’t lose, as this is pretty much no different than gambling. I do think this run has legs on it, it will go further, but I don’t think we will be seeing more 8000% years going forward. Those of us that watched from the sidelines missed this once in a lifetime opportunity. It IS fun crawling around on these pump and dump coin forums and throwing small amounts of money at them. Most of the time I make a little, but i do small amounts. A friend of mine bought something for 4$ and sold it for 800. I never would have believed it if he hadn’t sent me a screen shot of it. Nothing this stupid is sustainable, but there is probably still money to be made.

    Bitcoin itself in an interesting one. Its transaction times are way too slow to be a viable means of exchange. The mining costs are going through the roof too. But, there are splits coming up, and you get free coins for amount of BTC you hold. Anyone holding bitcoin on August 1st got that amount of BCC. There are more forks coming. But, I still think it will go the way of Alta Vista and Netscape Navigator. John McAfee may well be eating his own dick, because a million just seems a bridge too far. There are too many coins that do a better job fulfilling the role bitcoin was designed for to see it going to a million. But, a year ago 19k seemed inconceivable too so who knows. Its interesting your friends says ETH and bitcoin cash are where to be. I think litecoin is going to be seeing a lot of inflows, simply because its the cheapest thing on coinbase, and thats where a lot of the new money comes in. Coinbase sucks, too. The original money i put in was in bitcoin at around 9k, and my plan was to pull it out after it doubled. It doubled, but coinbase app on my phone was useless. Couldn’t sell. By the time it started to function again, bitcoin was back down to 16 or so, and below my sell point, so I left it there. Now its even lower. It was annoying to not be able to sell when I wanted, but it would have been downright terrifying if I had a lot of money tied up in this.

    In short, don’t put anything into this that you aren’t willing to lose. Be well. I wish all you guys a merry christmas and a happy new year.

    • ” Nothing this stupid is sustainable.”

      Wise words.

      Our frequent foil, economist/blogger/taco-eater Tyler Cowen, calls it a “crypto-asset,” not a crypto-currency. Big difference, and I think he’s right.

    • I think litecoin is going to be seeing a lot of inflows, simply because its the cheapest thing on coinbase

      Unit price is irrelevant.

  6. I sold what little Bitcoin I had at the peak of the bubble. Bitcoin has some problems:

    1) Mining fees are astronomical during congestion. The crypto nerds talk about bypassing the banks and their credit card fees, but you will need to spend $20 in mining fees to buy a $5 ice cream cone as we have seen recently. It make the 2-3% charged by Visa seem cheap.

    2) Again to the point above you are moving from the villainous global bankers to a more trustworthy distributed aspect in Bitcoin. Sadly, the people that control the distributed mining power are all Chinese.

    3) Transaction volume for bitcoin is horrendously low. It’s under 10 per second. Anyone handling payment processing systems needs to be able to peak to at least 1,000 per second at a small scale and well above to be credible on any large scale.

    4) Bitcoin is highly unstable which is exactly what you don’t want in a currency. If you want gambling excitement, go to Vegas.

    Crypto currencies are here to stay, but Bitcoin has a lot of fundamental problems that means it’s not likely to make it in the long haul. More than likely, we’ll see the emergence of bank issued/ guaranteed crypto currencies or the same from the government. These groups can swoop in and basically take over the market if they deliver a stable and trustworthy solution that eliminates the problems above.

  7. That fiat monopoly money from Rothschild is a coupon. Its due to expire pretty soon, with Renminbi replacing it. Maybe. Bitcoin represents the understanding that fait currency is WORTHLESS. Its not a good idea. You have to have electricity, computers, internet, and a running economy. SHTF. Bye. Gold isn’t much better. Too expensive and no one starving is gonna sell you the last bits of their food. Even if you can find someone selling, no one can break a Kruggerand or a gold bar when you buy some snacks. That’ll be a eyebleed markup there.
    Food, Guns and Ammo. SHTF. That is WHAT YOU NEED. DO NOT EXPECT ANYONE TO SELL IT EVEN AT GOUGE PRICES. Systems are hard to maintain, when they collapse, nearly IMPOSSIBLE TO GET BACK ANYTIME SOON. ESPECIALLY WITH RIOTS AND LOOTING. Take a look at Hurricane Katrina. That was localised. Nationwide its 1000 times worse, and maybe not coming back EVER.

    • Food (and potable water) is key, but the point is to be able to sustain production of food because should things get sporty they will outlast your stash. Then the problem is keeping what you have, in an environment where your have-not neighbors organize a “government” whose first act will be to rob you. Throughout history farmers fared poorly in chaotic times. Too visible, too vulnerable. It’s a major paradox.

    • Yes, but if you can parlay those bitcoins into more food, guns, and ammo while everything’s still working, then you’re ahead of the guy who eschewed them and thus had less resources to buy FGA at the same time, true?

  8. Don’t feel bad, my first “advice” to flip some dough to btc was around the $0.10 level.

    Btc has rendered all prior manias insignificant. It exceeds Tulimania by several orders of magnitude.

    Tulips still exist. Maybe so will cryptocurrency in several centuries.

    I still think the future holds an unprecedented deflationary credit collapse, but the stopped clock has yet to be right even once.

    There are too many competing monetary claims on too few underlying assets. The world economy is a vastly overleveraged “bank” just awaiting the biggest bank run ever.

  9. I refuse to believe that bitcoin is as secure as the propaganda has it. Even the makers themselves have the massive incentive to cheat and give themselves treasure chests of new bitcoins. Why wouldn’t they? They kings of England and all the nations of medieval Europe did it by debasing their own currency to get more “oomph” for the buck.

    Bitcoin is like Beliebers: mostly suitable for teenage girls with menstrual problems.

  10. I’ll stick with my USA Fiat Currency American Dollars thank you. Now that Trump is in total control of the Treasury the FED the Military and America my Fiat US Dollar and our Stock Market will boom and boom and boom. Lot’s of $ pouring into America and lots of new currency increase plans on the table for 2018. The Crypto space is becoming way too crowded for any semblance of an organized, sane market. Caveat emptor at all times.

    PS – the Euro will be a short at some point as the EU is in BIG trouble now.

    • For some reason, it seems appropriate that the Kakistocracy blog end on a Crypto Christmas note. Sad, but appropriate.

  11. Hopefully we will hear more from Porter someday, perhaps in a book. His writing is far above the reach of this blog, and despite my enjoying it immensely, surely it seemed like a misuse of valuable time to the author.

  12. You have a good break Porter. I loved your work. I will check in every now and then but if this is the end then let me say Good bye, good luck, I won’t forget your writing ever.

  13. Is Porter the same person as dc.sunsets ? They both seem to have quit writing at the same time. This was one of my favorite blogs and dc.sunsets had the best comments here and over at Vox Popoli.

  14. I miss your writing, Porter. I’ll watch this space and hope for you to resume blogging, but best wishes for getting your own work done.

  15. Porter, I still check your site every day, out of habit and hope. Also to see if you’ve tweeted anything. You’re missed, and I’m hoping you’re writing a novel.

  16. Thanks Major and others who have expressed kind encouragement…or just the vague hope that our Red Guard hasn’t unburdened my spine of its skull.

    I will try to resume writing-in-the-wind once time and motivation can be marshaled. In the meantime, thanks again for checking in. Reading the comments here was the best part of blogging.

    • Glad you are still among the “free” and living, Porter. I, too, still check this place every couple of days out of habit, especially when I see something especially stupid in the news, and wonder if you’ll be reacting to it. No shortage of stupid in the news lately, either. Hope you start writing again sometime, but I know ‘unpaid blogger’ probably ranks pretty low among the things that demand your time. Take care, brother.

  17. Pingback: This Week In Reaction (2017/12/24) - Social Matter

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