10 things I’m thinking about with Crypto going into 2018
Having got interested in cryptocurrencies and blockchain technologies in mid-2017, the following list is of the top 10 things on my mind in this area as we go into 2018. A lot of these I need to research more, so I don’t know how grounded in fact they are, so I’d be keen to hear the views of others too.
1. Will Bitcoin’s dominance come under threat?
Bitcoin is often seen as a store of value more so than a currency, and of late many people have spoken about it being ‘Digital Gold’.
Many years ago, when I was looking at investing money, I always harboured the idea of having a gold ingot or two. They would have been worth a bit, even if the value fluctuated, but practically they’d be useless. I wouldn’t be able to pay for anything with it, and certainly I wouldn’t have been able to break it into smaller pieces to do so. There would have also have been some level of handling costs and commissions to convert it into real money. And, if I was being sensible with it, I’d have probably wanted to have it stored somewhere more versatile than under my floorboards or buried in my garden, which would have incurred costs too. In reality, had I ever invested, it would have been the sort of investment where I was taking the view that the value in it was tied up for the long term, because it’d make more sense to just leave it sitting there, rather than have to deal with moving or morphing it.
To an extent, Bitcoin is like gold now, in that it’s got so expensive and time consuming to move that it just seems easier to leave it where it is. I’m even thinking that perhaps the costs of moving it masks its true value, and that as such this is driving a lot of people to just leave it where it is. In the same way that digging up my garden for my harboured gold would have been my last resort when everything else had lost its value orbeen squandered, so my Bitcoin is looking right now like the very last thing I’d redeem. I don’t see it has a future as a currency — like gold I see it as a store of wealth.
The problem is however is that gold is real. And Bitcoin is tens of thousands of years behind having the durability of gold. On that basis if the last asset I’d redeem would actually be my Bitcoin, then something seems wrong.
If we assume blockchain technologies are here to stay, then, like what happened in the early dotcom era, there’s no reason why Bitcoin might not become the Compuserve, Excite, Lycos or Alta Vista of the space (although of course Bitcoin can’t be acquired as such) — a name we’ll only remember in the future when prompted about recalling how things were in the beginning.
Over 2018 I think we will see other currencies or tokens come to the fore whose governance models are more advance than Bitcoin, allowing their blockchains to be managed more efficiently. Since March 2017, Bitcoin’s overall dominance of total market capitalisation of all altcoins has fallen from the well above 80%+ it’s been at for years to as low as just under 40% in June, during which time Ethereum rose to 32%. The market has diversified significantly since that point — a trend we should expect to continue.
2. Will Amazon start their own currency?
One area where Bitcoin’s dominance might come under threat in the future is from Amazon.
Amazon owns a lot of computing power, which at any given second has a lot of redundancy that could be given over to mining.
Amazon has a lot of customers who could pool mine when connected to an Amazon service with that time being used as a measure of engagement to reward loyalty.
The tokens mined could be offset against Amazon services, and used as a currency in general.
There is no reason why Amazon couldn’t or wouldn’t launch a currency which would resolve many of Bitcoins issue around efficiency and energy consumption, as well as take Blockchain currencies properly to the mainstream. I think it will.
3. Is it too late for other people to be getting into Bitcoin?
I don’t think it’s too late to be getting into investing into Blockchain based product and services. While those who are considering doing so generally phrase the question around getting into Bitcoin, I write here about why I think, if you are planning to invest from scratch that you’d think about other currencies too.
4. Will a major exchange go to the wall?
As I see it exchanges face three key challenges going into 2018. Scale, security and liquidity. Issues with either of these could put any given exchange into a precarious position, and with a lack of regulation and consumer protection, investors and traders could risk losing all of their assets, even fiat which is sitting there waiting to be traded.
Scale
In the second half of 2017, and this last quarter especially, so many people have jumped on the crypto bandwagon that exchanges have struggled to keep up with demand. Such are the demands around security that scale isn’t something than can just be resolved by throwing more servers in rotation, because of the extent to which everything needs to be hardened and locked down.
This has resulted in extended periods where investors haven’t been able to access trading platforms, with that situation always having been worse when prices have been on the move the most, because that’s when demand has been highest. The damage this has caused to some reputations could be hard to recover from.
Kraken has suffered particularly badly since about August time, although it claimed just before Christmas that is was almost through this rough patch. Back in August it suspended a number of trading pairs and also pulled a number of order types in a bid to reduce load. However as customer demand grew the problems reared up again, and by the end of November, when they claimed to be signing up 50k new users a day, the service was barely useable. The way in which they managed communications during these issues was particularly poor.
Security
Exchanges are an obvious target for hackers because of their size in terms of the customer details and assets they hold. And the bigger they are the harder they fall. There are two types of online business. Those that have been hacked and those that are about to be hacked.
Liquidity
If the crypto bubble bursts and there is a short, sharp decline in currency values, which lasts for a sustained period, then I think certain exchanges could hit liquidity problems and risk insolvency.
Summary
Given when people trade on exchanges, they tend to do so without having access to any wallets. As such it’s hard to see how investors would have any chance of protecting their assets within an exchange if one hit trouble.
5. How will things improve for everyday investors?
What really needs to improve is the general customer facing aspects of crypto based businesses, exchanges in particular — especially around customer care and communications. On some platforms it can take weeks, even months, to get important account issues resolved through support queues, which are often the only avenue for asking for help.
In recent months, when certain exchanges have hit reliability issues, communications around these have been really poor. Even the odd tweet which explains the problems wouldn’t go amiss.
One area that is steadily improving are the quality and care given to ICO websites, and then the subsequent product sites they become. This makes sense — because those guys only thrive by attracting investment. Exchanges should follow that lead, and not get lazy on the basis that investors need exchanges to the extent they’ll accept what they’re given.
Traditionally, whenever there’s been new innovation online it takes a while for the customer facing aspects to get to where they need to be from a usability, communications and content perspective. This is no surprise given that a lot of innovation is driven initially by developers, because, wherever the idea comes from, a team of devs is required to get any service up and running. In terms of how plans evolve, discovery is managed and requirement changes processed, it’s a production based activity, and that’s where the magic happens.
The downside of this is there often isn’t, at the early stages, enough people thinking about how a product might be received by the uninitiated, which for something new, is most of the addressable market. I think we are seeing the effect of that more acutely in crypto because of two things.
Firstly all currencies are effectively global from day one, in that anyone can trade them from anywhere. This makes is hard for a product that comes out of one country to have a polished enough consumer facing proposition that can be engaging worldwide, because culturally that takes time.
Secondly, the level of technical expertise required to build blockchain technologies and the high security it demands requires developers of a particular ilk, and those guys aren’t often the most consumer friendly people, or best able to boil down a proposition to the basics for customers who are learning as they go.
6. How will things improve for people in general?
This is a hard one. Currently the prices of many coins are based on the extent to which investors have bought the vision of how that particular use case for blockchain is going to improve something for the better. So, for example, if Bitcoin wants to be a widely accepted day-to-day currency, but fails in that objective, or another coin achieves that first, then unless Bitcoin finds another key use case it will fail and its value drop.
Of course the purported uses and benefits of blockchain applications are many and varied. We’re at a level of ideation not seen since the early days of the dotcom era. Did all those ideas work back then? No. Some because they were poor ideas, some because the world wasn’t ready. The same will happen this time around.
Other than more outlets choosing a currency in which they will accept payment for products or services, I think the biggest shift we’ll see is in companies using tokens to reward loyalty or behaviour. I wouldn’t be surprised to see UK firms use Electroneum do a lot of this, especially in mobile and gaming. I also think we will see more used of currencies for proprietary services. A good example of that is the Binance Coin, which can be used for payment of transaction fees on the Binance platform at a significant discount (assuming of course the price of that coin doesn’t continue to sky rocket!)
7. What will we see around regulation in UK
I don’t know that we will see anything specific happen around regulation. I’m sure a savvy player in the UK market will look to see how or what they’d need to do to get some level of FCA approval as a means of winning consumer confidence and stealing a march there. The closest we have to this is the Plus500 platform. Although this doesn’t allow you to own currency is does allow you to trade CFDs on Bitcoin and other altcoins.
What we will undoubtedly see is calls for regulation as a result of consumers getting into difficulty through their own stupidity or lack of education. I can already picture the stories in the rabid right wing press, centred around some fool, who having ploughed either his/her life savings, or borrowed money, into Bitcoin, lost it all as a result of a crash, a misplaced wallet or some hack as a result of having a password like password, or having chosen not to be bothered to use 2FA. This poor unfortunate will bemoan how the risks weren’t made clear enough. In the example of the misplaced wallet people will struggle to understand why the currency manager can’t help. Arguably exchanges or brokers could do more to absolutely insist on forcing users to use stronger passwords and 2FA, but then I’d also argue we’re in 2018. If the average person hasn’t yet worked out why they need to be more robust around online security, then more fool them. Again, there are those who have been hacked, and those who are about to be hacked.
Once this has happened a few times people will be up in arms. They’ll be a Panorama programme on it. Clueless MPs will wade in. It will be demanded that something has to be done.
Lack of formal regulation aside, responsible businesses in this sector will I think do more to apply best practice because they’ll realise its in their best interests on the basis it fuels consumer confidence. Electroneum are a good example of this. When they launched their ICO their levels of security were GCSE standard. It was woeful. But shots were fired across their bow and they heeded the warnings and made significant improvements.
Maybe we’ll even see a few providers get together and launch an industry body that looks to regulate itself under a shared code of conduct, in lieu of regulation — similar to what used to be the case with ISPA and IAB — with the work they do there being used as the starting point for any new laws.
8. What to do with the gains made in 2017
A lot of people will be going into 2018 having made some decent gains in 2017. So what’s best to do with those? My plan is to try and draw some kind of an income, which I’ve written more about here.
9. What does all this mean for tax?
The UK tax year ends effectively end of March, and, by coincidence I run my business financial year to the same timescale.
Guidance published by Her Majesty’s Revenues and Customs (HMRC) in 2014 suggested that gains in trading cryptocurrencies at a personal level be subject to capital gains tax (CGT) and at a business level to corporation tax.
HMRC could collect a reasonable amount of money under both taxes if my own personal and business successes are typical, assuming people like myself declare the gains. (Which I will.) The challenge though is in the detail.
In my head, my gains are calculated as a percentage, a bit like interest in a savings account. So, if I’ve made a 10% gain, it’d be much easier if I could pay income tax on the gain, and then for each subsequent year pay interest on the gain on my gain. That would require me to just report one figure which was an aggregate of all my accounts, with each currency reported as GBP based on the exchange rate at the end of the tax year. If HMRC wanted to challenge my honesty on this then they’d be able to look across all my various crypto accounts and calculate relevant GBP gains and loses by looking at all my trades and applying an exchange rate. There is some talk in the guidance about where gains are accountable to income tax, but it only talks about that in the context of non-incorporated business.
My feeling is, if I’m keen to report my gains, then in the spirit of self-assessment, HMRC should trust me to be doing so honestly and fairly. This straightforward approach I think would result in far more tax revenues.
If however it needs to be calculated to arrive at a figure for CGT, then on the basis that a gain is not made until an asset is disposed of, each trade would need to be listed individually. That’s problematic. Apart from the fact it would take me days to calculate this, I can’t see how it would ever be practical for HMRC to validate it if they chose to challenge it. The guidance says HMRC will look at this on a case-by-case basis. I don’t see how it has the bandwidth to do this. In my experience, when HMRC say ‘case-by-case’ it really means ‘we have absolutely no idea how to deal with this.’
Compare this to how it might work if the gains are being reported for a business, where corporation tax is due. Here, I can’t see any other way in which I wouldn’t list the value of all accounts at the end of the year, whereby all those gains would just sit alongside other bank accounts on my balance sheet and be used to calculate my overall corporation tax bill. Thus, it’s the business equivalent of what income tax would be at a personal level — and this is good enough to calculate tax due for a business it should be for individuals too. After all, whichever way its charged, its still revenue fo the Exchequer.
10. Building on my random thoughts
Alongside these nine points, I’m also wondering at what point my business might start accepting payments in cryptocurrencies. I’ve touched on that here — which is my public notebook for all the various thoughts I have about this exciting area of technology.
