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…
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.
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.
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.
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.