Last week, I wrote in my column about what I expect to happen in 2021 and how I think investors should deal with it. There was one topic I didn’t mention: bitcoin. Bitcoin ended 2020 at a price of around $29,000. That was up about 300% in just one year. In 2021, which is only two weeks young, Bitcoin already rose by more than 40% to almost $42,000 in the meantime, only to drop by 30% to around $29,000 again and then rise again by more than 20% to currently around $35,000. If you haven`t already, you should consider to invest in BTC. First of all you need a good exchange, you can find one at this page.
Welcome to the everyday life of the crypto world, who has not been through this so often. It’s basically like the stock market, but on a compressed timeline. The important question now for some who haven’t been in Bitcoin that long: Is the air out of Bitcoin yet?
I think I owe my readers an assessment on that, as I am (hopefully) partly to blame for one or two of them jumping on the Bitcoin bandwagon in the last six to twelve months. My answer to that is unequivocally no. Neither in the short nor long term.
Why I continue to invest in bitcoin
Well, as far as the long-term assessment is concerned, the honest answer can only be: Anything can happen, really. It doesn’t have to be that Bitcoin will prevail. Ethereum can also become huge, read our other article. The first of all cryptocurrencies may well still disappear. At the moment, however, there is nothing to suggest that it will. Therefore, from a long-term perspective, I would not change my “buy” stance on Bitcoin.
In the medium term, I see it a bit more differentiated. If you look at the Bitcoin price history, you will see relatively clear cycles. In the following chart, I have once shown the Bitcoin price since the end of 2012 in relation to its respective previous high price – that is, by how many percent the Bitcoin price was below the respective historical high price. To easier predict the future price you can use one of the trading bots mentioned on this website.
You can see two very similar bellies, each of which formed over a period of about four years (from high to high) and caused a drop from the previous high of about 80%.
- These four-year cycles in Bitcoin are no coincidence. In fact, that is roughly the time between two so-called “halvings” in the Bitcoin algorithm. Without getting too technical: A halving means that from one moment to the next, Bitcoin miners receive only half as many Bitcoins as a reward for their mining service.
- The last halving took place in May 2020, when the reward for finding a block in the Bitcoin blockchain was halved from 12.5 Bitcoin to 6.25 Bitcoin. This halving rhythm has historically defined the Bitcoin cycle so far. Before halving, there has always been a price low and then after halving, Bitcoin has stormed to new highs – literally.
- So as crazy as Bitcoin’s performance since the middle of last year sounds, it is normal by historical standards. At not quite 5x, we are currently practically exactly where one would have ended up on average at the comparable point in time after the last two halvings.
- This blue line shows how Bitcoin would perform since the last halving if we take exactly the geometric mean of the developments after the last two halvings. That would mean a price of $300,000 by November, before falling back to $100,000 by the end of 2022 and looking forward to the next halving in 2024.
A more fundamental perspective
Those of you who have known us Fools for a while know that we don’t believe in pure charting based on historical prices. We are primarily concerned with the fundamental outlook.
But I also see these given with Bitcoin. The fundamental view is driven by two factors: The narrative that Bitcoin is becoming a real alternative to gold, The fact that more and more companies and institutional investors are gaining interest in Bitcoin and are also jumping on the bandwagon. The former depends on the latter. If the latter changes, the “Bitcoin is a digital gold” narrative could also quickly vanish into thin air. However, as long as it does not look like that, I personally see little reason for concern in this regard.
A fundamental “value” for Bitcoin can also be derived from this narrative (Bitcoin = digital gold). The best work in this direction, in my view, has been done by a Dutch institutional investor under the pseudonym PlanB. He has found that the value of a rare good (such as gold or Bitcoin) is statistically very closely related to the so-called “stock-to-flow ratio”. This ratio basically tells us how much of a commodity we already have available on Earth at the moment, in relation to how much more of it we can extract each year.
Anyone interested in a little more detail on this: In this article I have tried to describe this phenomenon described by PlanB in more detail. For this article, it is sufficient to know two things about this model:
- the higher the stock to flow, the higher the value,
- the stock to flow of Bitcoin doubles after each halving,
- the Bitcoin price has historically followed this model quite closely so far, including the trend since the last halving.
This model also sees the next Bitcoin high well into six figures. So: I wouldn’t classify a tripling to Ver-X-folding from the current price as a surprise at all. But.
No guarantees when investing!
As plausible as all this sounds, there are no guarantees when investing! From my point of view, there is a lot to be said for the fact that things may turn out as expected. But the future is and remains unpredictable. I would by no means bet everything on the future coming as expected.
However, I would dare to conclude that it is far from too late to invest at least a small part of one’s portfolio in Bitcoin and crypto in general. Very few hedge funds, corporates and other institutional investors are in yet. So you can still get ahead of all of those. In the long run, anyway. I see a very bright future for the crypto market in general. Maybe not just for bitcoin. In fact, there are now a lot of even more exciting projects – and very few of them want to replace Bitcoin, but are setting out to solve completely different problems. But that is material for another article that I would like to write in the coming weeks.
Cryptocurrencies could bring almost 1.3 billion euros in tax revenue
The treasury is benefiting from the ongoing Bitcoin boom: as a new study shows, crypto tax revenue due is reaching a record high. Bitcoin is celebrating its comeback, the most popular cryptocurrency keeps setting new records, and private investors are rushing into the cyber currency market. Investors are not the only ones who can be happy about the profits – the tax authorities are also benefiting from the rally.
For the 2020 tax year, the tax revenues due amount to 1.28 billion euros. This is the result of a joint study by crypto tax start-up Blockpit, the Frankfurt School Blockchain Center and the law firm Dr. Andres. The figures are projections. The German Federal Ministry of Finance does not record tax revenues from crypto trading separately, it said when asked.
The calculated revenues correspond to about two percent of the total income tax revenue for 2019. In the last tax estimate for 2017, the tax revenue due from crypto assets was still 726 million euros.
Blockpit analyzed anonymous user data for the study and mapped an “average user” – so outliers up and down are already factored out. The portfolio of the average crypto investor had a value of 32,129 euros as of December 31, 2020. In the entire tax year, he generated taxable gains of 10,836 euros and tax-free gains of 7558 euros. Cryptocurrencies are increasingly establishing themselves in the investment world. Currently, Bitcoin in particular is experiencing a rapid price increase. Since the Corona low on March 13, 2020 of 4017 dollars (according to data from the analysis firm Coinmarketcap), the price has risen to currently just under 40,000 dollars.
“The popularity of cryptocurrencies has been rising again since 2018, so the market capitalization tripled in the past calendar year,” says Florian Wimmer, CEO and co-founder of Blockpit. Within one year, the market capitalization of all cryptocurrencies grew from around 170 billion to almost 630 billion euros. Also read the article on this website, regarding BTC and taxes.
However much the significance of cryptocurrencies for the treasury is growing in theory, the current tax law is completely unsuitable for capturing the special features of the more than 8,000 existing cryptocurrencies, finds Jörg Andres, a lawyer for tax law: “When it comes to the taxation of cryptocurrencies, the analog legal past hits the digital crypto future recognizably hard.”
The study authors criticize that so far there is “no legal qualification of blockchain-based assets for income taxation purposes.” The ultimate sufferers, they say, are investors who invest in cryptocurrencies – and have to document their trades in a complicated way for their tax returns.
Until now, the tax authorities have treated transactions with cryptocurrencies as private sales transactions. This must be stated accordingly in the tax return. Exempt from this are investors who do not exceed the exemption limit of 600 euros per year or who hold the cryptocurrency for at least one year.
That’s why Blockpit founder Wimmer advises, “The correct documentation of all trades is fundamental for the calculation of the tax burden incurred.” Crypto investors would be well advised to transparently document all income from their trading with Bitcoin and Co. This is because the tax office can also demand retroactive proof.