- China's digital yuan may or may not become a global digital currency, but it is sure to bring new fiat coins to the crypto scene.
- New age of government intervention in crypto may be upon us.
- Governments might simply outlaw Bitcoin, but author believes this to be unlikely. Instead, they could just tax it to death.
- Other cryptocurrencies would be dragged down in the wake of any government attack on Bitcoin. Investors may be able to hedge with Monero.
Like many Seeking Alpha contributors, I'm an avid SA reader as well as an SA writer. Sunday night J.G. Collins published a fascinating article on Bitcoin (BTC-USD) "Buh-Bye Bitcoin" - in case you can't tell from the title, he's bearish. I recommend reading Collins' piece to digest his full thesis, but the gist of it is that China's digital yuan the e-RMB will be the catalyst that shoots Bitcoin's rocket ship out of the sky and undermine the US dollar's position as the world's reserve currency to boot.
For me, the most salient prong of Collins' thesis is his prediction that the e-RMB will spur Western countries to introduce their own state-backed virtual currencies in the near future. It hasn't happened yet, but I agree that it's only a matter of time before big government becomes a major player on the crypto scene. This is a legitimate risk that Bitcoin and Altcoin investors need to keep an eye on, not only on the if and the when, but also the how. Given Bitcoin's meteoric rise over the past year, hype has propelled it ever forward past $60,000 a coin, but proper risk management is still key.
Big Government And Bitcoin
Collins believes that countries will eventually neutralize all competitors by criminalizing Bitcoin and other digital currencies, which is a possibility, though I am not convinced of its inevitability. Especially here, in the United States, the land of "muh freedom," during a time when crypto is at its hottest and even your grandmother has a Bitcoin wallet, making Bitcoin contraband would spark instant and widespread outrage. In his analysis of Palantir (PLTR) and Operation: Hidden Treasure, Vincent Ventures argues that the government may not even have the authority or capability to overtly crack down on Bitcoin.
If the US government really wants to take down Bitcoin, there is a much subtler way to do it, and here is where I believe the real threat to Bitcoin lies. First, they can simply outlaw Bitcoin on the commercial side by prohibiting businesses from accepting it as payment, rather than confiscating it from consumers. That would immediately terminate Bitcoin's transactional utility as a digital currency.
Curiously enough, Bitcoin itself may not be as affected by such a development compared to other cryptos, due to its deflationary nature, it has far more utility as a store of value than a medium of exchange, a position often pushed by Mark Cuban in his interviews. But while it may not go down to 0, its value will definitely plummet as the core thesis of Bitcoin taking over the financial world no longer holds water.
Tax It To Death
The government doesn't even need to go that far. They can simply write and enforce a discriminatory tax rate on business Bitcoin transactions. Companies will either pass that extra cost on to consumers, like small businesses often do with credit card processing charges, or decline to accept payments in Bitcoin entirely (an easy option unless cryptos reach critical mass, which they can't do if they are taxed at exorbitant rates). The effect would be the same: people won't or can't buy things with Bitcoin anymore, the bull thesis pops, and Bitcoin market value takes a nosedive.
The tax hammer looming over the future viability of Bitcoin as a medium of exchange is not hypothetical, it's already here. If you're buying and selling things with Bitcoin, you're probably engaging in tax evasion without even realizing it. That's because IRS Notice 2014-21 classifies Bitcoin as property rather than cash, which means capital gains and losses are triggered with every transaction. Due to the daily, minute-to-minute fluctuations in BTC market value, that effectively means every time you exchange Bitcoin for a good or service, it is a taxable event.
You're supposed to report these transactions on your tax return, but nobody does, because who has the time to keep track? So far, the IRS hasn't been actively pursuing this issue, but it could change its policy at any time, especially with its new reported focus on enforcing cryptocurrency taxes and the Biden administration's prioritizing of increasing IRS funding to boost government revenues, one of the few proposals by the White House that has bipartisan support.
In sum, the IRS doesn't need to outlaw crypto (though it could), it doesn't need to create new laws (though it could, and probably will), it can simply step up enforcement of the laws that already exist and make crypto transactions so cumbersome that consumers turn away from Bitcoin due to the record keeping nightmare and businesses turn away from it due to the extra accounting expenses that would be necessary to balance their digital ledgers. Maybe Collins is right and this move will coincide with the US government's introduction of an e-USD, which would be able to bypass these problems by nature of being a fiat coin.
How Can Investors Hedge?
If this scenario transpires, who loses? Bitcoin, naturally, though it would still retain some appeal as a store of value. Tether (USDT-USD) would probably get crushed since its whole shtick is being backed by fiat, not to mention the whole controversy surrounding Tether Limited and Bitfinex's alleged market manipulation. Ethereum (ETH-USD) would still have a place in the world due to its smart contract and dapp ecosystem. Ripple (XRP-USD), as the favored cryptocurrency of financial institutions with a focus on digital payments, would be enormously impacted by the release of state-backed digital currencies. Companies in the crypto business would also take a hit, spotlighting this issue as a risk factor for Coinbase Global's (COIN) IPO debut on 4/14.
One possible hedge against government crackdown in the crypto world is Monero (XMR-USD). Due to enhanced privacy technologies, Monero is the only real competitor to Bitcoin on the dark web (Europol reports that movement of funds cannot be tracked if someone uses a combination of Tor and Monero, this same article reports that the Darknet Marketplace has completely terminated support for Bitcoin payments and accepts only Monero as of December 2020). If the government outlaws or otherwise cripples Bitcoin through taxation, one natural refuge would be to return to the shadows where Bitcoin first got started, the dark web, and its new currency of choice, Monero.
That said, this is an imperfect hedge, Monero has proven to be sufficient to support dark web activities even at a fraction of its current market cap, so while there will still be some underlying value in the event of restrictive government controls, it would still fall along with the rest, just maybe not so far. Also, let's be clear we are just talking about buying Monero for investment purposes, this article is in no way an endorsement for using your Monero to make illicit purchases on the dark web!
I'm not necessarily bearish on Bitcoin, and I'm actually very bullish on blockchain technology in general, but the risks are real and investors should be aware. The e-RMB is here and other fiat coins are sure to follow, heralding a new era when big government officially enters the world of crypto to flex its might. If the state does set its sights on crypto as predicted by legions of analysts, Bitcoin is obviously the biggest target, but other currencies would also be vulnerable. Tread carefully, for here there be dragons, one of them is an uncle and his name is Sam.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.