Interactive Investor

bitcoin ends 2018 with 25% rally

21st December 2018 14:09

Gary McFarlane from interactive investor

It's been a terrible year for bitcoin, but the leading crypto is strong into year-end. Award-winning cryptocurrency writer Gary McFarlane discusses whether it will last and other industry news.

Bitcoin and the wider crypto market is experiencing something of a mini Santa rally. From lows near $3,000, bitcoin has reclaimed the $4,000 mark for a 25% gain, while other top coins have followed in its wake. 

Bitcoin is currently priced at $4,095, according to coinmarketcap.

Although too early to call this the bottom of the bear market, bulls will be encouraged by the sheer weight of trading volume that has fuelled the breakout this week. Daily trading volumes across the entire crypto market have more than doubled, rising to $28 billion. 

If the price can regain momentum today and continue into the weekend, then there is not much in the way of resistance between $4,500 and the $6,000 level last seen on 14 November, the day the Bitcoin Cash fork took place, blamed by many for triggering the price crash into the $3,000s.

However, with strong resistance already seen two rejections of $4,200, the bitcoin price could still yet fall back towards $3,500 or lower.

And before we all get too carried away, Mati Greenspan, an analyst at investment platform eToro, reminds market participants about the short squeeze effect: "For those wondering what's causing cryptos impressive push from the floor this morning, look no further than short covering.

"People are looking to reduce their exposure and closing out high-risk sell positions before the holidays and this is creating upward pressure on market prices, which is ultimately resulting in a rally."

 

Source: TradingView  Past performance is not a guide to future performance

From a UK perspective there has also been some big news on the regulatory front, with HM Revenue & Customs (HMRC) on Wednesday issuing a policy paper entitled ‘Cryptoassets for individuals' ( https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals ), in which it outlines their tax treatment, in line with the findings of the Cryptoassets Taskforce Report we previously reported on.  

The main takeaway is that crypto will not be treated as money or currency, which means the previous grey area that meant trading profits could be treated as tax-free in the same way as spread betting or foreign exchange gains.  Capital gain tax and income tax both come into play, depending on how individuals use their crypto.

As expected, the Financial Conduct Authority (FCA) is also being positioned to take on regulation of the industry. Government minister John Glen saying that the government wants regulation to help the UK to be a centre of crypto and blockchain innovation.

Facebook is building a cryptoasset for a Whatsapp remittance service

Regarding other market-moving news, Bloomberg reports that Facebook is developing a "stablecoin" for use on its Whatsapp platform, with an eye on the remittance business in Asia and no doubt beyond.  That is huge news and it looks like the rollout will take place initially in India.

A stablecoin is a cryptoasset collateralised typically against a fiat currency such as the dollar. There has been a rash of stablecoin launches in the past few months, because of doubts about the 1-to-1 dollar backing of market leader Tether. 

The unsourced Bloomberg report says Facebook still has plenty of work to do before the service launches, as it is still working on "a plan for custody assets, or regular currencies that would be held to protect the value of the stablecoin".

David Marcus, a one-time PayPal executive, heads up the Facebook blockchain division and has been on a hiring spree of late. Marcus was previously the head of Facebook Messenger, so he knows a thing or two about both payments and messaging.

Western companies are some way behind Tencent's WeChat that is a trailblazer in in-app and mobile payments.

Whatsapp has 200 million users in India and Facebook itself has 2.5 billion users worldwide.

Altcoins on the up

We dig a little deeper into developments in the UK regulatory arena below, but first let's return for a brief look at what's been happening elsewhere in the crypto market.

The star outperformer among the altcoins (i.e. all coins other than bitcoin) has been Bitcoin Cash (BCH), which has more than doubled in value this week, jumping from a recent low of $77 to currently trade at $217. 

That will be music to the ears of Chinese mining giant Bitmain. It has filed for an initial public offering on the Hong Kong stock exchange. 

Rumours that Bitmain was burning through its funds as mining becomes less profitable or even loss-making, has led to claims the Hing Kong stock exchange was getting cold feet about allowing the IPO to go forward. Bitmain is a major backer of Bitcoin Cash and a large holder of the cryptoasset.

Other coins standing out from the crowd include St Petersburg-based decentralised application platform and exchange Waves. 

Since the end of November, it has been making price gains for no apparent reason but the market eventually got an explanation a couple of days ago when it was announced the platform has secured $120 million in a funding round led by London-based financial services firm Dolfin. That suggests there been some insider trading going on, which is not illegal in the under-regulated world of crypto not yet at any rate.

The funds will be used to develop Waves's Vostock private blockchain, designed for corporations and government and public bodies.

Dolfin chief executive Denis Nagy said the deal underlined London's growing position as a fintech hub: "London is becoming an increasingly important destination globally for DLT and other disruptive technology projects. We are proud that Waves and Vostok have selected London as one of their technology сentres, as well as their trusted global hub for legal and financial expertise."

In July Waves entered into a partnership with global audit, consultancy and advisory firm Deloitte, which has a significant footprint in Russia.

Waves is off nearly 10% today at $3.74, presumably on profit-taking.

Ripple's XRP token, a favourite of crypto traders and retail investors because of its partnerships with more 130 banks and financial institutions around the world, has risen 27% from week lows at $0.29 to $0.37, although is down 3% in the past 24 hours.

US exchange Coinbase has been running a ‘12 days of Coinbase' promotion with an announcement on each day. One of those announcements included the listing of stablecoin USD Coin (USDC).

On the 18 December it listed four new cryptoassets on Coinbase Pro – what it describes as its exchange for professionals. 

The coins were Dai (a stablecoin), Maker (linked to Dai), Golem, and Zilliqa. The last of those is a blockchain platform that deploys "sharding" technology to effectively split a blockchain into multiple blockchains, thereby delivering far greater scaling than is currently possible on the likes of bitcoin or Ethereum. Popular messaging app Telegram is thought to be making use of similar tech for its closely guarded blockchain upgrade. 

Coinbase is probably the largest holder of cryptoassets in the world and it pretty much revealed as much in a blog this week. In the blog it explained how it had upgraded its cold storage (off-internet) security, saying it had: "moved 5% of all BTC, 8% of all ETH and 25% of all LTC in circulation (among many other assets) in what we believe is the largest crypto migration on record".

Binance positioned for growth

A couple of important interviews with leading industry figures threw some light on the state of the industry and market.

Founder and chief executive of Binance, the largest crypto exchange, Changpeng Zhao, spoke to Bloomberg this week, and provided some perspective on this year's bruising bear market.

"There will always be speculation which will cause the price to fluctuate, either over fluctuate upwards of over fluctuate downwards. Last year it overfluctuated too much and now we are in the correction phase"

As to whether we have reached the bottom he wasn't sure, although he was speaking before the bitcoin price reclaimed $4,000.

"Now we're in the correction phase but don't know if its ended. I hope it's ended but we're never sure.

Looking past the market gyrations, he added: "The long-term industry will be sustained by real applications, real use cases of cryptocurrecnies, which a lot of people are building and that's happening regardless of the price."

He said that Binance has plans for a dozen fiat exchanges (crypto exchanges that have dollar, pound etc trading pairs). It has already opened one in Malta and will launch another in a couple of months in a location he did not disclose.

On regulation, he said it's a myth that top exchanges such as his do not comply with know-your-customer (KYC) and anti-money laundering (AML) rules, adding: "We definitely welcome regulatory involvement. We want clarity and good sensible regulations - ones that promote innovation and not things that hamper innovation."

Binance will hold its first blockchain conference next month, in Singapore – fast establishing itself as one of the major centres – if not the major centre – for the industry. 

Galaxy Digital's Novogratz says we're near the bottom

Hedge fund manager Mike Novogratz, founder of Galaxy Digital, was interviewed by Bloomberg on 17 December, and was similarly relaxed, as might be expected from a leading industry player, about the state of the market. 

"We had a bubble – it popped. You've had a monster correction. All coins are down 80%. It wasn't tulips. It was a mania built around something that was real... I see progress being made on the technology side, I see progress being made on the entrepreneur side and progress on the institutional infrastructure side. When I look ahead I'm pretty constructive."

He said his company's over-the-counter and trading business was healthy, although asset management not so much as it was hard to get people to invest during this deep correction. 

He added he still has "high conviction" in bitcoin and blockchain, saying "it's timing not destination".

Novogtratz explained the thinking behind his confidence: "I'm certain we will have a digital store of wealth – I think it will be bitcoin and I'm fairly certain we will have Web 3.0, this decentralised worldwide computing system that processes and authenticates data and lots of tokenised objects from investment funds to art and all kinds of things."

He went on: "When there's blood on the streets there is often opportunity… Fidelity and Bakkt have got customers lined up."

Regarding the market direction, he thinks the pain is almost over: "[We are] close to the end of the move on the downside. I see signs of capitulation in price and some big spokesmen such as Brian Kelly [of the BKCM crypto-focused investment firm] – a big advocate of crypto – turned bearish on the lows, a good sign the end is close."

Contrary to some other estimates, he reckons the breakeven for bitcoin miners is nearer $3,000, not the $4,500 others have calculated.

Novogratz still holds to a digital gold thesis for bitcoin valuation: "What's special about bitcoin? There are 118 elements on the periodic table; the rest need a use but gold is valuable because it is valuable. All the gold that's ever been mined could fit into two and a half Olympic-sized swimming pools or one 20m cube. That's worth $8 trillion? It actual makes almost no sense.

But bitcoin is not exactly storing value more effectively than gold at this point, so how does he explain that, the interviewer asked. "If you bought bitcoin two years ago you're still up."

In the near term "bitcoin is in consolidation in the $3000-6,000 range", he concludes.

"In two years, people are going to look back and see this as a huge buying opportunity in the crypto space."

There was one piece of news in crypto that took people by surprise. Brit Blythe Masters resigned "for personal reasons" from her position as chief executive, where she has been since 2015. 

Masters previously worked at JP Morgan and was the first high-profile Wall Street banker to join the blockchain industry.

UK regulators and HM Revenue & Customs may their move

The Guardian reported yesterday that HM Treasury wants to see the FCA take on regulation of crypto.

John Glen, economic secretary to the Treasury and City minister, told the newspaper: "The government will consult early next year to explore whether other crypto-assets that have comparable features to specified investments but that fall outside the current perimeter should be captured in regulation."

That had previously been trailed in the Taskforce report, but he also made the surprising observation that "benefits could potentially develop in the future through the use of initial coin offerings as a capital raising tool".

The report says the government has asked the FCA to "to consider taking on the role of supervising companies in the areas of money laundering and terrorist financing". HM Treasury expects the FCA will set out rules for consumer protection and investor redress.

The FCA has already made clear it intends to clampdown on the use of contracts for difference (CFD) products to create crypto markets, as is done by many UK foreign exchange and spread betting trading firms. European regulators earlier this year forced CFD brokers to reduce margins for customers and include health warnings in their marketing.

The HMRC in its paper mentioned at the top of this report, sets out what it says are three types of cryptoassets: exchange tokens, utility tokens and security tokens. The paper deals with just the first category, exchange tokens, which HMRC says includes bitcoin.

Although it does not consider cryptoassets to be currency or money, it defines exchange tokens as "intended to be used as a method of payment and encompasses ‘cryptocurrencies' like bitcoin".

The HMRC says in the majority of cases capital gains tax (CGT) will apply to investment gains: "In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets."

It also explicitly states that income tax is payable on trading profits: "HMRC taxes cryptoassets based on what the person holding it does. If the holder is conducting a trade then Income Tax will be applied to their trading profits."

The paper also covers crypto mining, determining, depending on the behaviour of the individual, that CGT and income tax will apply: 

"If the mining activity does not amount to a trade, the pound sterling value (at the time of receipt) of any cryptoassets awarded for successful mining will be taxable as income (miscellaneous income) with any appropriate expenses reducing the amount chargeable.

"If the individual keeps the awarded assets, they may have to pay Capital Gains Tax when they later dispose of them."

Fees and rewards received from mining are also "chargeable to income tax".

The comprehensive HMRC paper also covers the area of "Airdrops", where an individual receives an amount tokens in a particular cryptoasset by virtue of holding another, often as a result of marketing activity of a split on a blockchain. If airdrops are received "in a personal capacity" income tax does not apply but if they are received in payment for a service then it will.

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