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On fluffy ponies, purple unicorns, virtual love and other crypto craziness

16 August 2021 Gareth Stokes

The world of blockchain, cryptocurrencies and non-fungible tokens (NFTs) has delivered more than its share of laugh-out-loud and what-the-fluff moments in the past months. My most recent fall-off-the-chair-laughing moment came courtesy this gem of a headline on News24: ‘Fugitive SA crypto developer ‘Fluffypony’ arrested in the US’. I challenge you, dear reader, to recite that out loud without laughing. It is not my intention to waste column inches on why someone might go by the nom de plume Fluffypony, and my only objective in sharing this headline was to illustrate that anything dealing with crypto, no matter how inane, is considered newsworthy these days. (You may wish to read the Fin24 article, which includes reference to ‘Cape Cookies’ for extra laughs.)

The tulip bubble and other pricing lunacy

Crypto assets and cryptocurrencies are flavour of August for a number of reasons, of which three are worth exploring in more detail. First, they are under increased scrutiny from governments and financial sector regulators. Second, the price of Bitcoin, Ether and the usual truckload of associated altcoins are showing signs of making a fresh push to new highs. And third, because each surge in cryptocurrency prices is followed by the inevitable bleating by the global ‘bubble territory’ cult. We will start with the third point first; just to maintain the appropriate level of quirkiness. 

A financial market bubble is defined by Investopedia.com as “an economic cycle that is characterised by the rapid escalation of market value, particularly in the price of assets”. And more specifically, it notes, “during a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value, with the result that the price does not align with the fundamentals of the asset”. Those who prefer a more visual illustration of the concept will find comfort in a dissection of Tulip mania, which played out during the so-called Dutch Gold Age in the early 1600s. Tulip mania, or the Dutch Tulip Bulb Market Bubble, is not only one of the most famous market bubbles of all time, but also offers a tangible illustration of the concept. 

In broad brushstrokes, because we prefer not to present too much history alongside a crypto discussion, Tulip bulb prices soared massively between 1634 and 1637, with every man and his pony queueing up to get a slice of the action. Individual Tulip bulbs were soon changing hands for 4000-5500 florins, around six times the average annual salary at the time, with some creative accounting estimating that a bulb might have set you back US$750000 in early 21st Century money. Sound familiar? The point is that the pricing was totally disconnect the underlying good, and nobody was surprised when the bottom fell out of the Dutch Tulip market, around February 1637. You should note that in today’s context, the correct terminology for ‘bottom fell out’ is ‘bubble burst’. 

Forget this bubble talk, Bitcoin is on the charge again

As already mentioned, the price of Bitcoin, Ether and the usual truckload of associated altcoins started showing renewed signs of life late-July 2021, following what seemed like an eternity of range-bound price action. The result was an almost 60% surge in Bitcoin from its R435k level on 21 July to R685k on 12 August. Ether was even more impressive, shooting 76% higher to a price of R46k over the same period. These price movements, according to the huge throng of crypto fanatics who publish content on YouTube and other social media platforms, confirms that the cryptocurrencies are re-establishing their bullish trend. They are all crowing: “The breakout from the ascending triangle should see us test the resistance at the first Fibonacci retracement level blah blah blah … with an ultimate price target just south of the moon!” 

Whether Bitcoin gets to the moon or not is moot, because the South African Revenue Services (SARS) will probably cut your profit in half. This brings us nicely to our final (and the first of three points) in today’s crypto rambling. Regulators are taking a long, hard look at your crypto asset activities to ensure that they get their fair (sic) share. I took a stab at the topic recently, in an article titled ‘Nowhere to hide… Advice for your crypto asset clients’. My view, and that of many experts, was that profits from crypto trading would be seen by tax authorities as income whereas buy-and-hold activity of at least three years’ duration would trigger a capital gains tax event. I have since learned that SARS will probably treat all cryptocurrency gains as income. Your best bet is to get advice from a qualified tax practitioner rather than trusting your gut and creating tax problems for your future self. 

Holding the senate to ransom

Sticking with the regulation theme, we heard recently that US Senators were squabbling over cryptocurrency tax reporting provisions contained in their Infrastructure Investment and Jobs Act… Apparently Biden is in favour of a “strengthening of enforcement when it comes to crypto currencies” to help, in this instance, to raise US$28 billion over the coming decade towards the US$550 billion total cost of the Bill. News agency Bloomberg has since reported that the “cryptocurrency industry failed to win a change to crypto tax reporting rules in the infrastructure bill, leaving intact language for broad oversight of virtual currencies in the legislation that passed the Senate on Tuesday, 10 August”. 

Our observations are that cryptocurrencies are being rapidly sucked into the mainstream, which has me wondering about the ongoing erosion of Bitcoin’s investment case. Fortunately, we have the newswires to cure our crypto asset blues… Did you know, for example, that a Polish influencer recently sold her love, virtually and in the form of a non-fungible token (NFT) for a staggering US$250000? The world did not hear it from me first; but I’m hoping this is the first you hear of it! Of greater absurdity is the US$18000 that an Italian sculptor fetched for an invisible sculpture, using the same digital tech. This news had me gasping and guffawing, but mostly because I did not think of it first. 

And that dear reader, is the financial (sic) world we find ourselves in circa August 2021. We are vying for ‘to the moon’ returns from ADA, Bitcoin, Dogecoin and Ether on the one hand; trying to make money for jam from NFTs on the other; and on the third hand (yes, quirky) we are trying to bag that illusive purple unicorn by making 100x our money from a high-risk, start-up, pre-IPO purchase. At the very least, may this piece scoop an award for the best use of hyphenated words in a pre-closing sentence.

 

Link: Fugitive SA crypto developer ‘Fluffypony’ arrested in the US

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