Ripples Can Be Felt

Headline: What is up with Ripple and their litigation with the SEC?  Are there lessons to learn?

Date: 9/5/2022

Body:  Think promotions and commercials for financial services are bad now?  Back before the Securities Acts of 1933 and 1934, things were REALLY bad within the financial markets.    Without fear, mischievous and outright fraudulent pitchmen would be hawking their “can’t miss” investment opportunities.  Well, with the advent of cryptocurrency, the past is repeating itself, or at least rhyming the new lyrics with the old ones.  Scams abound, and projects that are semi-fraudulent are legion.   Add to this mix, the natural back-biting and scrambling behaviors that are part and parcel of Federal budgeting, and it seems that successfully prosecuting these criminals is a budgetary bloodsport.   One of the recent actions was brought by the SEC.  In this move, the SEC is asserting that Ripple Labs  perpetrated a $1.3 Billion fraud when they floated an unregistered security.

No, don’t leave!!  This one is really interesting, I swear.  OK.  The complaint alleges that the XRP sold (the digital asset on offer) was a security that they sold without validly applying for or receiving an exemption to registration requirements.  Now, this one seems most interesting because the majority of the digital assets that were distributed were in exchange for services rendered ,like market making.  Said one SEC official, “”Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies,” said Stephanie Avakian, Director of the SEC’s Enforcement Division. “We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system.”  This is interesting because the 1933 and 1934 Acts were not passed to disallow the selling of certain securities, rather, they were passed to ensure that potential investors had enough access to information to do their own due diligence research into the offering.

The’ Issue seems to hinge upon whether or not the XRP qualifies as a security.  Now, here’s the Law & Order bit: there is a smoking gun memo wherein the SEC officials discuss whether XRP is a security or not, and apparently the SEC does not want to turn this over to Ripple in the discovery phase of the trial.  (To me, not a lawyer, Ripple must have the scent of blood in their nose and this memo is likely red meat.)  It seems that the SEC is trying to exclude all memos like this, but the judge has decided to shield only some of these documents from discovery.  Said Ripple’s defense counsel, “We’re pleased with the Court’s order, which grants Ripple access to important documents that the SEC was withholding. We will continue to aggressively defend this case – and we remain optimistic that resolution of this case will provide much needed clarity to the industry,” Ripple General Counsel Stu Alderoty.  One of the documents sought is a draft of a speech by an SEC official, wherein he opines that ETH is not a security.  This would provide excellent evidence that XRP is not a security either.

Why go after Ripple?’

There are hundreds of other cryptocurrency related schemes, why go after Ripple?   The answer is three-fold:

1.  The market capitalization is quite high
2. Their parent company has agreements in place with many central banks of other countries.
3. They have developed DLT which will allow for much faster transactions and clearing.
4. They issued XRP in proportions in excess of the Howey test, and therefore, they are presumed to be securities.
5. Ripple was already taken to court by some of its’ investors.

The Verdict

Security?  Not a security, who cares?  I get your point of view, really I do.  But this is important because this has ramifications far beyond Ripple.   There is a question of where and how this digital asset can be advertised.   How should it be taxed?   This is a VERY serious when it comes to making money with cryptocurrency.  Additionally, the outcome could possibly lend some much needed stability to the pricing of such digital assets.  If pricing were more stable, it makes it much more possible that larger pension funds and institutional investors will get involved with digital assets and this would lend some excellent evidence of confidence in digital currencies, and might encourage others to get started in digital currencies.

 REFERENCES

https://www.sec.gov/news/press-release/2020-338

https://www.coindesk.com/policy/2022/01/14/sec-must-surrender-hinman-email-on-ether-to-ripple-judge-rules/

https://www.investopedia.com/xrp-loses-support-as-sec-files-case-against-ripple-5093766

https://www.nasdaq.com/articles/xrp-news:-why-ripple-investors-will-be-watching-august-31-and-october-15-this-year-2021-06

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Is Cryptocurrency a Good Hedge Against Inflation?

Headline: Is cryptocurrency a good hedge against inflation?

Date: 9/3/2022

Body:  I don’t need to tell anybody that inflation is rapidly deteriorating  financial positions of citizens almost everywhere.  Wouldn’t it be nice if we could find an investment vehicle that would accelerate earnings as the inflationary environment worsened?  One such investment (we’ve seen these before) are TIPS, or Treasury Inflation Protected Securities.    The face rate does not change for these securities, but, as the inflation rate goes over a threshold value, the principal gets added to, so you are now multiplying by a higher number.  Sounds pretty good, doesn’t it?   I think it does.  But it would be even sweeter if we could get this feature within an appreciating security… like maybe cryptocurrency?  Could cryptocurrency serve as that hedge against inflation?   Let’s discuss this further.

No, cryptocurrency is not a good hedge against inflation

Bitcoin has lost significant value over the past year, and this would argue against the hypothesis of cryptocurrency hedging inflation.  In order to serve as an effective hedge against inflation, cryptocurrency would have to be a significant store of value, long-term.   Said one expert, With crypto, “the extent of [price] volatility is so significant, it’s very hard for me to view it as a long-term store of value,” Anjali Jariwala, certified financial planner and founder of Fit Advisors.  “It’s tricky because it’s supposed to act like a currency, it’s taxed like property and some people compare it to a commodity. At the end of the day, it really is its own asset class that doesn’t have a pure definition.”

So, how does it become a genuine store of value?

First, the market needs to mature and long-term investors need to become involved.   These might be traditional large banks or institutional investors, but they don’t have to be.  There are crypto-focused ETFs and mutual funds that are arguably prepared to take part of this responsibility.  Another symptom of a mature market is that participants have an agreed-upon set of metrics.    In this very moment, consultancies like Chainalysis and others are in discussions about this.  I think that in the next 2-3 years, there will be a generally agreed-upon framework of market metrics.

The authors also make the point that Bitcoin needs to be broken out from the pack, to help cement the idea of a mature market.  Currently, when cryptocurrency is breathlessly covered by the mainstream media, all of the hundreds of currencies are grouped together, and spoken of, as if their average is truly meaningful.   Bitcoin is so much larger than the rest, it can really be the tail that wags the dog, within cryptocurrency.  So, for the market to mature, the level of understanding within the media also has to mature.   As of now, at least Goldman Sachs is separating Bitcoin out from other cryptocurrencies within their reports.  We’ll see how long it takes the media to take notice.  I will try to introduce some of the most often encountered characters.

Market capitalization

Market cap (for the cool kids) is really easy to compute for cryptocurrencies.   It is simply the value of one unit of that cryptocurrency, multiplied by the number of units available in the market.  For example, if a cryptocurrency is priced at $10,000 per unit and there are a total of 20 million coins in circulation, the market capitalization for that cryptocurrency would be $200 billion. This metric is important because it gives you a sense of the size of the cryptocurrency market. It can help you determine whether a particular cryptocurrency is overvalued or undervalued.

Funding rates

Funding rates are payments made on a regular basis between traders to keep the price of a perpetual futures contract close to the index price.  A perpetual futures contract is an agreement to buy or sell an asset where the contract doesn’t have an expiration date. Positions may be kept for as long as the trader wants, but the trader must pay holding fees, also known as the funding rate.  Think of this as an option to buy a cryptocurrency at a certain value on a daily basis until the buyer wants to quit.   Certainly, the exchange will charge a fee to keep this option open, and they do.  But, if a lot of these “options” are being exercised, it’s a sign of optimism in the market for cryptocurrency.

Bitcoin heat map

This cryptocurrency indicator looks at past price data and creates a color heat map based on the percentage of increases over the 200-week moving average (MA).   Red or orange areas of the map indicate intense trading activity and might signal a good time to sell cryptocurrency into an active market.    A blue area indicates that activity is low, and might sugges a buying opportunity.

But, in the future, cryptocurrency might become a good hedge against inflation.

On the other hand, when the price dots are purple and close to the 200-week MA, it’s usually a favorable moment to purchase Bitcoin.

Other experts take a more cautious point of view on this matter.  Many of their arguments center around the fact that cryptocurrency is very new and does not yet have a track record.  Said one expert, “Once volatility smooths out, we will have a better picture of how it responds to macro developments, like the rate of inflation or what the Fed is doing,”   People in this camp even cast doubt upon the ability of gold to serve as a hedge against inflation.  To corroborate this view, they cite the 1980s.  In this period, the inflation rate was 6.5% and owning gold, the investor would’ve lost 10%.  Not a very good hedge at all.     But, in the current era, since the beginning of 2022, the value of gold has increased 3%, suggesting a real hedge against inflation.   As proof that cryptocurrency might provide a good hedge against inflation, they point to the 1,100% increase in Bitcoin value over the last 5 years and compare that to the CPI increase of only 18.5% in the same period.

The authors go on to suggest that the bouncing ball we SHOULD be following is economic growth.  Cryptocurrency does not directly help to employ anybody or produce a product or service.  Investments in companies that produce goods or services, this does support jobs directly.  Further, a potent inflationary stimulus is international armed (and unarmed) conflict.  Use of cryptocurrency seems impotent compared to these issues.

The Verdict

“Overall, I think anyone seriously worried about inflation should put crypto on the table as an option that can protect against some inflation scenarios and take advantage of others. It’s not a magical hedge against inflation. Nearly all crypto assets have so much non-inflation-related risk that they are appropriate only as small parts of diversified portfolios rather than either core holdings or pure hedges.”  These are the words of an author cited, and I can put them no better.  Right now, it appears to be a bad hedging strategy, but in the future, it might represent a valid portion of a good plan.  Am I hedging a bit?   Perhaps.

 REFERENCES

https://www.cnbc.com/2022/07/08/why-bitcoin-doesnt-seem-to-be-a-hedge-against-inflation.html

https://www.fool.com/investing/2022/06/08/heres-why-bitcoin-is-a-good-inflation-hedge/

https://www.bloomberg.com/opinion/articles/2021-12-13/crypto-is-an-imperfect-hedge-against-inflation

https://www.coindesk.com/layer2/2022/02/16/bitcoin-isnt-an-inflation-hedge-yet-but-heres-how-it-could-be/

https://cointelegraph.com/trading-for-beginners/the-most-common-crypto-metrics-a-beginners-guide

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Am I Certifiable?

Headline: How to get a cryptocurrency trader certification

Date: 8/31/2022

Body:  If you need to get a complicated surgery, you might look at the walls of the surgeon’s office and look for certificate or diplomas.   These are serious credentials.  But in addition to medical professionals, one can get certified in almost any profession or activity.  In point of fact, I just heard that one college in Norway offers a summer-time program, certifying people as “elf-spotters.”  So, it seems unsurprising to find that there are certification programs for people who trade cryptocurrencies.

Formal University Education

Not for profit “real” educational institutions are not going to leave money on the table, so we should not be too surprised that some the most respected institutions of higher learning also offer a certification as a cryptocurrency trader.  Let’s take a peek at a few.

Cornell is a school in upstate New York, and is well-known for their Hotel Management graduate certificate.  But, they also offer a certification as a cryptocurrency trader.  Their certification in cryptocurrency trading appears to be excellent as well.   In the course of 4 sections, students go through their own theoretical ICO, and look at all of the challenges faced in this process.  They end the program with a Leadership Symposium.

The Wharton School is a part of the University of Pennsylvania, located in Philadelphia.   Their offering  is an entirely online program that seems to depend on case studies.  It is a 6-week program demanding 8-10 hours per week, and tuition of $4,500.   For this price, you get access to a wide variety of expert presenters on the topics of digital assets, blockchain and cryptocurrency.

Online Education Sites

There are more than a few educational sites on the internet.  Coursera and Udemy have cryptocurrency certifications amongst their offerings.  Surprisingly, (to me) LinkedIn also has a similar program.

Udemy offers such a cryptocurrency trading credential, and offers Lifetime access and a 30-day money-back guarantee.  (They also offer a large variety of other courses as well.)  One course, led by Professor Hassan comprises 12.5 hours of video instruction, and one print article.  He covers all aspects of selling, buying and trading cryptocurrencies, and even gets into portfolio management within the cryptocurrency space.  (Interestingly, this is the course that Investopedia identified as their #1 best buy.)

Coursera is another site offering cryptocurrency trading certification.  When I searched for cryptocurrency, I found 34 courses matching to that criterion.   These were from good sources too, including: Duke, Princeton and the University of Michigan.  All of these courses are free to take and get skills, but if you want them to show on a transcript, you will have to pay.

LinkedIn Learningà LinkedIn Learning also offered a good beginner’s course for $39.99 per month. When you consider you also get access to over 17,000 courses for that price (including eight cryptocurrency courses), that’s a pretty good deal as well.  Also nice about this option is that you are adding to your network of social contacts as you take your courses.  (This course garnered the award of “Best Value” from Investopedia.)

Other Organizations

Investopedia is one of my most favorite site for financial/Legal issues.   They offer 2 courses on Cryptocurrency.     The first one is expressly aimed at beginners and is $99.  The second one is $199 and is aimed at trading cryptocurrencies.  Both courses are video-based and offer lifetime access to their video libraries, and at the end of each course, the student can download and print a certificate.

The  Blockchain Council is  a world-wide association of 1500  people who are enthusiasts of the blockchain technology.   Their mission is to evangelize (their word) the benefits of the blockchain in all manner of cognate areas from Supply Chain Management to financial transactions.  They offer 3 courses relating to cryptocurrency, but these are interesting.   One of the 3 courses focuses on metaverses, and in the other examples, a set of metaverses is not emphasized.

Risk management is everything

Risk Management is boring — and happens to be the most essential skill necessary to be profitable. Understanding how much to risk on a trade and how to properly balance a portfolio are exponentially more important than entries and exits. Learning this takes time — most new traders are broke before they understand risk.

Most people would be far better off slowly investing a small percentage of their entire portfolio in crypto — and in Bitcoin, in particular. Don’t be fooled by the avatars on twitter — trading crypto is hard. 

The Verdict

There are a variety of places to get educated on the topics related to digital assets and currencies.  I guess that the key is to pay close attention to the credentials of the person teaching.  Carefully weigh these against the amount being charged for the education program, and always keep in mind what you are really taking the courses for. 

It seems that cryptocurrency is not leaving us anytime soon; Profit from it, if you safely can.   Key to that safety is learning.

 REFERENCES

https://www.investopedia.com/best-cryptocurrency-trading-courses-5111984

https://www.entrepreneur.com/article/425542

https://cointelegraph.com/news/trading-bitcoin-is-hard-10-things-every-beginner-trader-must-know

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Are You Feeling Out of Sports?

Headline: What are digital sports cards?

Date:

Body:  I remember being about 12 years old and I collected and traded baseball cards.  Quite a confession, I know.    People were serious enough about this hobby (read “obsession”) that there were magazines that were mainly devoted to supplying valuations for these cards.  I had a Cal Ripken Rookie card and I thought things couldn’t evolve any more.

I was wrong.

Now, there are digital sports cards being bought, sold and traded.   The Topps baseball card pack of the past would run you only a few bucks.   But, the digital sports cards of today (Think of them as NFTs) sometimes go for $150,000 or more.  And, you don’t EVEN get a single piece of fossilized, desiccated bubble gum.  Within the biz, these are called “moments.”  Most of these “moments” are reasonably priced at $10-$20, but a LeBron James dunk recently sold for $210,000.

Is this REALLY a Big Deal?

It would appear to be.     Started in October 2020, Top Shot already has 800,000 users and has registered almost $500 Million in revenue.  Dapper Labs is not doing this out of the goodness of their Canadian hearts,   the fee revenue is quite good.  Said the NBA Commissioner, “I think we’re just scratching the surface on what the potential is for blockchain to completely transform the digital collectibles industry.”

On the other hand, there are many who suggest that these digital sports cards will suffer the same ignominious fate as the founder’s previous project, CryptoKitties.  These also went up in value quickly… and then crashed.  In reply, Gharegozlou opines that he learned many important lessons from CryptoKitties, and will not make the same mistake with Top Shot.

What makes digital sports cards better than the physical sports cards?

By establishing the presence of the NFT on the blockchain, it makes it much harder to pass off bootleg copies as the real deal.   Since the ownership is permanently recorded in the blockchain, it is impossible to successfully create a copy that fools people.   In the case of digital sports cards, this also allows athletes the opportunity to monetize their images.

OK, so where do I go to purchase a digital sports card?

You have 2 options and there are advantages with each.   The first option is to go to Top Shot (or whatever the brand is) and purchase the NFT direct from them; Usually, you can even use a credit card.   The service will hold the NFT for you until you get another wallet.  The other option is to go to OpenSea or a similar exchange.  You might find a better deal here, but, you need to use a wallet (setup beforehand) filled with ETH (most likely.)  The thing to remember is that the rarer the clip (e.g. Alberto Bell hammering a Grand Slam) the more valuable it can potentially become.

This also brings up a new opportunity within a different debate.

For years now, the NCAA and the schools within the NCAA have been making money on the backs of their athletes.   For decades now, images of the athletes (along with their stats) have formed the basis of many sports-videogames.  Until now, the athletes have not gotten a cent, and would even get in trouble for receiving a submarine sandwich as a gift.  But now, there is NFTU which allows the university and athlete to profit.  West Virginia University has just joined this group.  (Did you know that they have a “Director of brand and trademark licensing?”  I didn’t.)  Both the players and the fans seem to be happy with this protocol:

“The relationship presents a win-win: fans are able to truly own and be a part of their favorite team on an interoperable and chain-agnostic platform, while the players themselves are able to generate revenue in entirely new ways that will be sustainable over time,”

Similar to many physical collectible trading cards, NFTU’s tokens are available in four rarities: common, premium, rare and ultra rare. Each animated NFT features an animated image of the player, along with their position, personal stats, jersey number, as well as music and sound effects. The platform, which currently only features basketball, announced Wednesday that it will soon add other sports, starting with football.

The Verdict

Digital sports cards are  an option for the person who wants to invest in NFTs.  The question is whether or not this will be an effective investment vehicle.     This is a tough call to make.   It’s akin to the question of whether or not investing in art is a good idea.  For most people, it is not, and they will lose a significant amount of their investment.  But, there are a few people who have a special understanding of the market (or a lucky charm hidden somewhere) who will make a big profit when they sell their work of Art.  I suspect that digital sports cards will be quite similar; Most will lose some money and a few will make a substantial profit.  If you find yourself in the 2^nd group, please remember to throw a nice reception.   And, invite me.

REFERENCES

Digital sports cards are receiving a popularity boost in the pandemic era | Fortune

Digital Collectibles: What They Are and How to Get Started (fool.com)

Reginald Grant & Cliff Pierre Launch NFTs By Athletes (yahoo.com)

West Virginia U. latest to join NFT marketplace for college sports (edscoop.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

My Analysis of Chainalysis.

Headline: What is Chainalysis?

Date: 8/22/22

Body:  I have now done a goodly number of these blog posts on topics related to cryptocurrency, and I have noticed a pattern, or rather, a common thread.  When you look at consumer protection for physical goods and services, you will often run into an entity called Underwriter’s Labs.  (You’ve seen this logo on almost every hand dryer at every restaurant you’ve been in.)  There is a reason why this is so ubiquitous: Underwriter’s Labs has worked hard for decades to build up the trust that people and companies have in their products and testing.  (They have a really fascinating facility in Illinois where they scientifically test everything from hand dryers to ballistic materials.)  Their logo has become truly iconic. 

In a similar vein, I have seen one particular entity over and over within these topics.  Their name is Chainalysis and they seem to be trusted by each small and large financial and cryptocurrency company I have seen.  In most articles, the first study cited is usually a study undertaken by Chainalysis.   Their results, too, seem to be taken as bulletproof.  So, how did they obtain this aura of trustworthiness?   I think this will be quite a powerful story, for cryptocurrency-based businesses and others as well.

OK, so what do they do?

I have already spoken of faith in a currency as one of the most important attributes it can have.  Chainalysis has a mission and that mission is to help others develop systems that others can have trust in their results.  So, Chainalysis consults on the best ways to audit and improve the technical aspects of cryptocurrency and compliance with regulation.  Unsurptisingly, they work with banks and governments.  Both of these are easy to see that payments might need to be accepted in cryptocurrency, or regulation might have to be considered.   But, they also work with insurance companies that insure the safety and availability of cryptocurrency exchanges.  All in all, Chainalysis seems to be well-positioned to be a first-mover within the cryptocurrency space.

Located in New York by Jan Moller, Jonathan Levin and Michael Gronager, this company was founded in October of 2014, and now has just over 100 employees.  In addition to consulting work of all types regarding cryptocurrency, Chainalysis also develops its own anti-money-laundering (AML) software.  In the most recent round of funding, Salesforce CEO Marc Berioff made a substantial investment and this is now a $2 Billion firm.  It uses this economic muscle to compete with Ciphertrace (a CA-based firm) and Elliptic, a firm based in the U.K.  In an effort to be excellent corporate citizens, Chainalysis tracked down $1 Billion, which the government then quickly clawed back from the perpetrators of Silk Road.

How serious are the illicit activities?

It really depends upon who you talk to.  Per the CEO of Chainalysis, “We are involved in conversations with regulators in the U.S. and the rest of the world,” Gronager said. “What is important to note is that this space has changed a lot and the amount of criminal activity is dropping a lot. It’s getting more and more legitimate use cases.”  He has a point, as illicit activity made up only 0.34% of transaction volume, down from 2% a year earlier.

On the other hand, this is transaction volume, not value, so these transactions might be far larger in value and it would be very significant.   Further, it seems reasonable to me that people doing illicit activities within cryptocurrency know pretty well how to layer their transactions within legitimate ones, and probably other tricks.  Point is, I think this might be an undercount.  (In a rather hilarious sidenote, the CEO’s girlfriend had her account hacked.  He asked the hacker for proof that her account would be fixed once the ransom was paid.  The hacker sent 16 statements of other incidents with good outcomes.   Gronager  used this data to shut down the account and get the miscreant arrested.)  It is important to note that many of the detractors of Chainalysis dislike their activities because anonymity is most important to them. 

The Verdict

Very often it is said that  anonymity is the highest goal of most people who use cryptocurrency.  To me, this is belied by 3 observations:

1.   Ethereum is one of the fastest growing cryptocurrency, and their transactions are anything but anonymous.
2. The sale of NFT’s at extremely high values suggest that people are not interested in anonymity.    The most valuable NFTs are the ones that are most unique, and easy to remember.
3.  Chainalysis is not the only company that does this work.   There are 4-5 other major companies around the world that are nearly equivalent, and everybody knows this.  Despite this, the use of cryptocurrency continues to grow.

It stands to reason that as cryptocurrency goes more an more mainstream, the anonymity hypothesis will be more thoroughly debunked.   As anonymity is seen as going down, I think faith in that system will go up, and this seems to be upheld by research done by Chainalysis.  Whether in USD or ETH, I think the prospects for this company are very good.  Mr. Gronager would seem to agree with me.   “In the past, there were internet companies and other companies. Then, every company became an internet company. I think every company will become a blockchain company. I want to bring transparency and compliance to every transaction. I want to make it a system everyone can actually use.”

 REFERENCES

https://www.crunchbase.com/organization/chainalysis

https://www.cnbc.com/2021/03/26/chainalysis-doubles-valuation-to-2-billion-with-benioff-backing.html

https://www.fastcompany.com/90756505/the-8-billion-crypto-unicorn-that-crypto-loves-to-hate

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Air Drops Need Not Turn to Tear Drops.

Headline: What is an “airdrop” and what scams could they be a part of?

Date: 8/16/2022

Body:  Nearly everybody has seen the Hunger Games scene where on character is dying of blood poisoning, and a silver parachute comes  gliding gracefully down just outside the cave entrance where the character is hidden.   Attached to that canopy was the elixir that would bring him back to perfect health.   In cryptocurrency, there is something similar, and it is called an airdrop.  Usually, the “items” being dropped are new cryptocurrency or NFTs for use by the recipient.

What is a cryptocurrency airdrop?

Usually, it is a tranche of new cryptocurrency or NFTs for the use of current cryptocurrency holders.   It is kind of like a dividend within the stock ecosystem.  In this case, the Board of Directors would deem that “Each owner of our stock as of 9/30/20xx shall receive a dividend of $.60 per share owned.”  The airdropping of cryptocurrencies would be distributed in a similar way, but, instead of going to physical addresses, the “checks” are written to the various wallets that have already purchased their currency.

The split of Bitcoin and Bitcoin Cash in 2017 is an example of a blockchain event that preceded a cryptocurrency airdrop. The airdrop distributed free Bitcoin Cash (BCH) to anyone who owned Bitcoin at the time of the split.

Nuts and bolts-wise, these airdrops are pretty simple.   The investor signs up to apply for the airdrop.   In the process, they have to give a public key to their cryptocurrency wallet (recall, money can only be contributed with this key.)   They might also have to give other details to prove that they are indeed owners of the original currency, as of the effective date of the airdrop.    Then, the details are verified with the exchanges involved, and the cryptocurrency is disbursed.

Are there different flavors of airdrops?

There are several different types of airdrops.  The bounty airdrop is in response to a user doing something to further the project of the coinage.  Perhaps they have to post to Facebook with 5,000 or more friends, or post twice to LinkedIn about the coinage.    The user has to provide proof that they have completed the task, and their wallet address, and the coins will be airdropped to them.  The exclusive airdrop sends cryptocurrency to only a few wallets.   This appears to be the most like a stock dividend as it goes exclusively to people who have held the coins since a certain date.  Holder airdrops require that a user hold a certain amount of coins at a precisely set time and date.   At that exact time, if the user has a qualifying amount, they will be airdropped a certain amount of new tokens.

Why might there be an airdrop?

Well, let’s hearken back to the stock example.  The Board of Directors want to see that a spin-off corporation is seen in a popular light in the investing world.   So, all of the investors of ABC corporation on a certain date would receive several shares of 123 corporation, their spin-off.   The founders of a cryptocurrency might want to start an even newer currency that has features not seen in the old one.  So, at this “hard fork” they distribute a quantity of the new currency to holders of the original currency.  The other reason is to promote a new cryptocurrency.   News of the airdrop is publicized and the value of the currency (hopefully) increases.

What are the Pros and Cons of airdrops?

How might airdrops be a kind of scam?

These scams are most often executed thru a decentralized exchange, DEX.   The person is sent to a site that looks very much like the DEX, when in reality, it is a site controlled by the scammers.  In this way, their entry of both Public AND Private keys can be witnessed.  Then, the scammers go to the real site, and drain a very real wallet.

What can I do to avoid these scams?

Few things:

1.  You always have a right not to receive the airdrop.  Don’t apply for one, and you cannot be vulnerable to this scam.
2. Be wary of airdrop tokens received from an unknown source. It is highly likely these unsolicited tokens are part of a phishing campaign.
3. Do not visit or connect self-custody wallets to any websites advertised by airdropped tokens through error messages, token names, or other methods.
4. Do not interact with airdropped tokens (e.g. approving, transferring, swapping, etc.). As annoying as it sounds, it’s best to just leave them sitting in your wallet.
5. Do not hold high value assets in the same wallet used to regularly interact with Dapps. Use cold storage or custodial solutions such freely available Coinbase Vault or Custody.
6. Make sure to confirm the legitimacy of the project before claiming an airdrop. You should be particularly careful when it requires you to connect your wallet to an airdrop website.
7. In an announcement of an impending airdrop, look carefully for broken English and mis-spellings.
8. Before receiving an airdrop, do your research and go to the project’s website and confirm that they are executing an airdrop.   If you are still not sure, think carefully whether it is worth the risk or not, to receive the airdrop.
9. You might want to think about setting up a special wallet with the sole purpose of receiving airdrops.  Once received, this can easily and securely be transferred to another wallet.

The Verdict

The airdrop can be a really effective way to reward ownership or perpetrate a fraud.   Think on it: It is quite literally ETH or BTC falling from the sky.   These are unanticipated by the recipient, yet welcomed by them.  On the other hand, in order to receive this “mana from heaven” the over-eager potential recipient could pretty easily be fleeced, and tricked into giving up valuable identifying information.  If people are airdropped currency, they should quickly check and make sure that the airdrop is not a bogus attempt  to trick them into giving up valuable information to be used by an unethical hacker.  Once again, the price we pay for such  great potential benefit is eternal vigilance.                                                                                                                                                                                                                                                                                                                             

REFERENCES

https://blog.coinbase.com/security-psa-airdrop-phishing-campaign-38b880c0298a

https://www.coindesk.com/tech/2021/09/21/no-airdropped-nfts-cannot-empty-your-crypto-wallet/

https://www.thebalance.com/what-is-a-cryptocurrency-airdrop-5217777

https://academy.binance.com/en/articles/what-is-a-crypto-airdrop

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

The Working Group.

Headline: What is the “Working Group on Financial Markets?”

Date: 8/15/2022

Body:  Ok, the background on this is that there is a current struggle within the U.S. Government; Agencies are battling to see who will have chief responsibility to regulate cryptocurrency.     The IRS seems to want to just tax the transactions as a capital gain, when they see the currency one way.  The CFTC wants to have more control over regulation.  The SEC (the big dog on this block) wants their pound of flash too.  (Sorry, bad cyber pun, won’t happen again.)  The  very serious point here is that  not only does the right hand not know what the left hand is doing… in point of fact, the left hand is actively waving off the right hand.  For this reason, the President convened a Working Group on Financial Markets, chiefly made of personnel from FDIC and OCC.  (No, the other OCC.  The non-motorcycle-riding one, as far as I know.)  This group just released a report on stablecoins.

These stablecoins are considered “stable” because their value is tied to the value of the USD or a commodity such as gold.  Said Secretary Yellen, “Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options.  But the absence of appropriate oversight presents risks to users and the broader system,”   So, the working group put together a few recommendations.   First, everybody remembers pictures of the Bank runs in the 1930s, there are copies in every history text to date.  To ensure that this does  not happen to stablecoin users, law should be written such that issuers have to be insured depository institutions.    This would seem like a win for the little guy, AND the FDIC.  Second, they were concerned with payment system risk.   To address this, they called for new law to require digital custodians to have federal oversight, and allow issuers of stablecoins to require these custodians to pass pretty strict risk-management standards.  (This sounds to me like a “stress test” administered by the private companies… personally, I am rather, err… umm… dubious about this.)  Hope for the best here.  The third set of concerns focused on systemic risk and concentration of economic power  OK, let’s take some time to look at this complicated-looking requirement.

In essence, they want a few things:

1.  Issuers of stablecoins should not be economically entangled with any other  commercial entity.  This is important because if there is a too tight alliance, that one entity could artificially control that  entire currency, regardless of market forces.
2. There should be interoperability between and among stablecoins.  This is important because, if you are invested in one stablecoin currency (let’s say, pegged to the dollar) but there is a large move in the currency market, you might want to convert to a currency pegged to the price of gold.
3. Congress may consider other standards for custodial wallet providers.  Ok, this is important too.  First, they want Congress to limit the strength of association of the wallet providers with any other commercial entity.   The reasoning is much the same as #1,   If one entity  gets to economically control a wallet provider, people could be wiped out instantly with the stroke of a pen (or stylus.)  They also want to limit how much use of your data can be made by the wallet providers.   Let’s face it: You are entrusting these companies with a LOT of data about your purchasing power, your purchasing patterns, even the charitable contributions that you make.   This would be PLATINUM in the devious hands of marketers, and believe me, they are salivating over this right now.  Congress wants to limit the amount of personal data that can be sold.

OK, in the next section of the report, they do a VERY governmental thing, and say that for the near future, the Financial Stability Oversight Council has to straighten out these thorny issues.

I  give up, who is the Financial Stability Oversight Council?

Isn’t it interesting that “oversight” usually means mistake, unless you are speaking of lawmakers?

Sorry, got side-tracked there.  Well, they certainly need help in the UX department of website development. (It is terribly difficult to read anything.)   That aside, they are a very important group within the Treasury Department.  Interestingly, the council seems to have authority to select non-bank entities for oversight.   This is important, given how large the shadow banking industry is, and how quickly the definition of currency is changing.  The Secretary of the treasury sits at the big seat, and the others include other federal and state regulators as well as an insurance expert appointed by the President.  They are important to seeing potential financial changes first, and then working to ensure that they are regulated adequately.   (Think of them as the high-beams of the financial vehicle’s headlights.   They shine a light on issues in the future, then engineer solutions to manage them with existing regulation.)  Interestingly, the Dodd-Frank Act further enabled them to enact risk-management standards on any Payment Clearing or Settlement activities.   They are also empowered to recommend closer oversight by any number of federal agencies, over these “systemic” entities.

They are required to present to Congress, every year, an Annual Report on their activities, and upon request, do other presentations in front of Congress.  In fact, large portions of the meetings are open to the public.  (I only spend so much time here because it seems likely that the “intermediate future” as enunciated by Congress could be a lot longer than we anticipate.  So, these committee members are VERY important to the regulation of cryptocurrency.)

Are they concerned about anything other than fairness within the market?

Yes.   Namely, the regulators are concerned that stablecoins could be used in an attempt to launder money.  To combat this, the Treasury Department has the Financial Action Task  Force looking at these money laundering issues and working with international partners to make things harder on the cybercriminals.

The Verdict

Reports of government instituted “Working Groups” are rarely spell-binding reads.   But, they are important to understand if you wish to be an informed citizen.    I think we should probably float the feds a little credit here, because we are all dealing with extremely new areas of finance here.  When mutual funds started up, it took government a little bit of time to learn how to regulate them.  And these were holding normal stocks and bonds.    Cryptocurrency wallets hold substantially nothing, but a stake in a very high-stakes experiment in behavioral finance.  It seems prudent that rule-makers be deliberate.  

 REFERENCES

https://home.treasury.gov/news/press-releases/jy0454

https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/about-fsoc

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Give cryptocurrency some credit.

Headline: What is involved in a retail establishment deciding to accept cryptocurrency

Date:8/12/2022

Body:  I can’t tell you how many little “Square” devices I have seen at small businesses.  These hardy folk just plug them into a smartphone, and begin taking credit card orders.   The adoption of this technology was very fast, so, it must’ve been a pretty easy decision to make.   This made me curious to ask what it would take for a small business to begin to take cryptocurrency as payment.  Up to now, only the larger organizations like AT&T, Microsoft and Overstock (among others) have decided to take Bitcoin and other cryptocurrencies as payment.  Now is when the smaller players begin to dip their toes in the liquidity offered by cryptocurrency.

What are the options to accepting cryptocurrency?

One option is to use a 3^rd party to do the exchange for you.   2 of the largest companies to play this role are BitPay and Coinbase Commerce.  BitPay will usually charge about 1% of the transaction total as a fee.   CoinBase Commerce doesn’t have a similar reference, but is likely quite similar.  CoinPayments is another payment processer and has a processing fee of only .5%.     GoCoin will charge a 1% transaction fee, but it works with so many services, that fee might be worth it for some people. Paypal is getting into something similar, but, they will also allow you to convert  some of the larger cryptocurrency into fiat currency.  TripleA appears to also have a function where Bitcoin is use for invoicing and  remittances as well.

Pros and cons of accepting Bitcoin at a business (or any cryptocurrency.)

How will crypto affect your operations?

Operational questions you might want to think through include:

• What training will staff need?
• Will you be prepared to answer customer questions?
• Are there elements of customer service — like issuing refunds — that need to be rethought?
• How will your crypto payments tool work with your current inventory or reporting practices?
• Do we sell a few units of expensive merchandise or many units of less expensive merchandise?  If the former, accepting bitcoin, with all of the extra time needed at POS, might make sense.   On the other hand, if you have a coffee shop where people spend $5-6 at a time, this cost might not make a lot of sense.

The thing about all of these questions is that they all require time.  And, as they say, time is money, and both are in very limited supply.   So, all of these questions, and others, must be thought through to consider the effect of cryptocurrency upon your day-to-day operations within a small business

Isn’t accepting Bitcoin just like accepting credit cards, like you were speaking of in the beginning?

Cryptocurrency is different from accepting payment from credit cards.   I really like this chart, so, it is repeated from the article below:

Just as in the Old West, there was a lot of opportunity, but, that was tempered by a whole lot of risks, the crypto is the new opportunity.  But, while reaping the benefits, one must be very conscious of the risks one is taking.  Banditos are everywhere, rattlesnakes are numerous, and dying from thirst is a real possibility. 

What are the tax ramifications regarding acceptance of bitcoin?

There are many tax ramifications.  Three particular issues come to mind:

1.  The IRS sees the cryptocurrency exchanges as property transactions, so for each one, records must be kept of how much the bitcoin was received at, AND at what price the bitcoin was converted to cash.  The paperwork to track this can be voluminous and the effort can be cumbersome.   So, systems must be designed to  accommodate these.
2. Sending data to your accountant can be difficult, as you are not sure that the data from your point-of-sale system is in the same format that your accountant likes.  If conversion of data is necessary (either by you or by them) there is significant cost related to this activity.
3. In all honesty, we are still not sure of all of the regulatory and tax ramifications concerning bitcoin and other cryptocurrency.   Future bad news on this front is very possible, and the uncertainty makes planning very difficult.

Should we accept ETH as well as Bitcoin?

This is a good question.   Bitcoin is better established, but ETH might attain much wider acceptance in the near future because of 3 features:

1.  The ETH blockchain allows you to execute smart contracts.
2. The ETH ecosystem is the one chosen by many gaming metaverses.  This is especially important if your main customers are going to be college-aged men and women, people who are demographically more likely to obtain value from this more flexible currency.
3. Transactions executed in Bitcoin are irreversible.   ETH transactions are a little more flexible in this regard.

The Verdict

“We anticipate that further partnerships with regulated and established institutions in the industry will help deliver the benefits of digital currencies (e.g., convenience and support) and will continue to build the necessary foundation of trust,” This was the conclusion of a PWC report about retail businesses accepting forms of cryptocurrency as payment.  Two things about this quote seem important.  First, adoption of bitcoin and cryptocurrency seems like a fait accompli, in the future.  When this is accepted by more retailers, the conversations will become more robust, and the systems needed to  negotiate this currency will become MUCH more available.   Second, they bring up the concept of trust.   Several times in this blog, I have discussed the role of faith in a currency.  Faith and trust are truly the coin of any realm, and as the adoption of cryptocurrency goes up, more and more regular consumers will use it because they have faith in it.  Whether or not that faith is well-placed, is something that we will all see, as the future rolls out.

 REFERENCES

https://www.uschamber.com/co/run/technology/how-to-accept-bitcoin-payments

https://www.nerdwallet.com/article/small-business/accepting-bitcoin-crypto

https://www.inc.com/amrita-khalid/cryptocurrency-bitcoin-payments.html

https://www.cnbc.com/2022/07/29/deloitte-75-percent-of-retailers-plan-to-accept-crypto-payments-in-2-years.html

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Jewel of a Trial?

Headline: Is Africa the next big Market for Cryptocurrencies?

Date: 8/2/2022

Body:  I will always remember one portion of an MPT documentary I saw decades ago.  The subject was Africa, and they mentioned that because infrastructure for copper-wire phones was so incredibly difficult to support, they had effectively “skipped” that generation of innovation, and very quickly embraced cell phones.  The embrace of cell phones was so universal and nearly immediate, that the trading of cell phone minutes had become effectively currency in many places.  So, it seems logical that the use of cryptocurrencies would be similarly embraced.  And, it has been; According to Chainalysis, in the 12 months since July 2020, Africans received $105.6 Billion in cryptocurrency  They seem to already be very accepting of these cryptocurrencies.  The question is; Why are they so ready to accept these currencies? 

The Banking Infrastructure is not well-developed

Cryptocurrencies are designed to be decentralized (peer-to-peer) in nature, and this flexibility allows them to be used in many different environments.   It also makes sending remittances very easy, and this is key; in 2019, roughly $562 Million was sent via cryptocurrencies to their home countries.

These Players mean Business

It did not take long for some entrepreneurs to start businesses to take advantage of this decentralized finance.  Empowa is a business that uses the power of cryptocurrencies to crowdsource financing for development projects.  Pezesha is a business that makes finding a loan easier by instituting a credit scoring system.  This system allows for  easier loan origination as investors can now see much more easily what projects are most likely to succeed.   Prior to this, such a system didn’t exist.  They have now facilitated more than 3,700 loans, and that leads to jobs, and development.  

Corruption is a problem in many places

Corruption is also a common problem that cryptocurrency can help solve, but we must exercise caution here.  Among the Top 10 cryptocurrency adopting states, the first 5 are often seen as corruption-adjacent.   But, #6 is the U.S., so we must face 2 alternatives:

1.  The U.S. is nearly as corrupt as many other nations on the list.
2. Corruption is not the main driver of accepting Cryptocurrency.

Are there any nations with particularly interesting approaches to cryptocurrency?

Yes, there are countries like this.  Kenya has setup a regulatory “sandbox” where they can experiment with many different approaches to regulation.    One expert defined this kind of sandbox as a “tailored regulatory environment that allows for the live testing of innovative capital markets related products, solutions and services with the potential to deepen and develop the capital markets prior to launching into the mass market.”   This is a really interesting approach as the transparency afforded by the sandbox could go a long way towards achieving buy-in from citizens. 

In another development, the Central African Republic has begun to accept Bitcoin as their nation’s legal tender.  As interesting as it is, we have to be realistic here.   The Bitcoin ecosystem is very energy-intensive, and the CAR does not have a robust electrical grid to support it.   (The IMF also raised some issues, mainly related to transparency, which is odd given that the blockchain is visible to everybody.) If it could be made to work, the stimulus created by Bitcoin could be support and be supported by the many mineral resources that the nation already has.  Further, there are plans in 2023 to install a vast and robust fiber optic network nationwide that will allow easy access to the Internet and cryptocurrency.   There is even talk of sharing this resource with nearby Cameroon.

But, what about the children?

Believe me, they are being considered, and profitably so.  An industry has sprung up, selling educational materials concerning Bitcoin; This information has to be translated into all of the major languages.  SHAmory is one such company that makes educational games and books.   So, perhaps in the future, citizens there might be more prepared to become involved in Bitcoin and other cryptocurrencies.  In Nigeria, Binance put on a program to educate 400 University students in how to use Bitcoin.  Clearly, they have a vested interest, but, as long as we all have our eyes open…

On the other side of the Bitcoin, children today are seeing some of the darker side of these cryptocurrency too.  There was an exchange located in South Africa, called Africrypt.    This company either went bankrupt or just disappeared, but not before stealing $3.6 Billion.  To make things worse, cryptocurrencies are not classed as financial assets, and  there were no laws broken in South Africa, and prosecution is impossible.   No doubt, the children of today will see and remember these crimes.  The question is, will the forgo the opportunity represented by cryptocurrency?

The World is Never Enough?

Bitcoin is infinitely better for most businesses if only for the clearing time required.   In most international transactions, it takes 3-5 days for a transaction to clear.  Within the Bitcoin ecosystem, transactions are cleared instantly, and this will serve to foster more business development.

The Verdict

Africa has some exciting prospects as it comes to cryptocurrency.  But, please note carefully the word “prospects.”  To my way of thinking, they are not here yet, and perhaps they will never be.  Maybe the electrical power grid needs to be developed before the adoption of cryptocurrency.   Maybe the educational component will prove too much to allow for cryptocurrency to gain scale.  We don’t know.  If you are thinking of investing in this space, I might suggest (for once) going with a specialty (read expensive) mutual fund that is run by a team of knowledgeable professionals; an index fund probably wouldn’t work here.  Look carefully at the credentials and experience of the management team before investing.

 REFERENCES

https://www.bbc.com/news/world-africa-61565485

https://www.forbes.com/sites/rufaskamau/2022/04/20/the-scale-and-challenges-facing-bitcoin-adoption-in-africa-today/?sh=4791938862b8

https://www.binance.com/en-NG/blog/all/6-factors-influencing-the-adoption-of-cryptocurrency-in-africa-421499824684903666

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.