Warning: Crypto is Napster and iTunes is Coming, Pt 1

I’ve received a number of emails from readers asking for my thoughts on crypto currencies.

First and foremost, I must warn you, I am a no-BS type analyst. So, if you want me to write something fluffy because you personally are a big fan of crypto, don’t read another word. 

It’s not that I’m opposed to crypto currency per se, it’s that I know how policymakers think as well as how central banks work.

And I know BOTH groups have BIG plans for crypto currencies.

First let’s address the technology itself.

Crypto is in fact NOT a currency. Prior to 1913, by law, Congress was the only entity in the United States permitted to issue currency. It then handed this responsibility off to the Fed in 1913. And the Fed is the ONLY entity that can legally issue currency.

So crypto currencies are NOT currencies. They are just another asset class. To argue otherwise is to say you are counterfeiting money, which is ILLEGAL.

Now, crypto is a tech asset. And all technological revolutions follow two phases:

1)    The initial breakthrough phase, which occurs before social/legal frameworks are in place.

2)    The “normalization” phase during which social/legal frameworks are implemented giving the technology a societal and financial legitimacy.

If you need a real-world example of this, think of the electronic music file or MP3 revolution. The first phase was Napster, which featured the sharing of music in what was later deemed as illegal activity (the legal framework was not yet ready for the technology).

Then along came iTunes: the normalized version of the technology in which MP3s could be bought and sold in a legally acceptable form. 

Bitcoin and crypto currencies are currently in the Napster phase of their development.

As such I am inherently wary of them. Moreover, we’re in something of a mania for this with over 5,000 currencies in the world. We are seeing crypto currencies that were literally created in TWO HOURS as a joke (Dogecoin as the tweet below shows), being valued at tens of billions of dollars.

I believe over 99% of cryptos are ultimately worthless. 


Because at some point the US Government is going to do one of two things:

1)    Start taxing cryptos like regular liquid assets (stocks).

2)    Introduce its own “cash-less” means of exchange/ digital currency.

Regarding #1, since 2014 the IRS currently views crypto  as “property” and suggests it should be taxed as such.

Now there is no federal property tax, so this would mean you would have to tax your crypto holdings based on what property taxes are in your local government. As of 2020, this ranged from the lowest state (Hawaii at 0.3%) up to the highest, (New Jersey at 2.2%.)

By law, come tax season you are supposed to value your crypto holdings at market values and pay taxes on them.

If you think that is bad news, you’re not going to want to read the rest of this article. 

The current Secretary of the Treasury, Janet Yellen, has floated the idea of taxing cryptocurrencies as much as 80%, yes EIGHTY percent.

She is not alone, President Biden’s proposed tax increases would see capital gains taxes as high as 43%.

So, you literally have the Commander in Chief and the person in charge of the U.S. Treasury BOTH pushing for taxing cryptos at a minimum of 40%.

You can ignore this or claim its bunk, but if the government has proved one thing over the last 300 years, it’s that if there is money to be made from taxing an asset, they will start taxing it.

On top of this, at some point in the future, the Fed is going to introduce its own digital currency. We’ll address this topic in tomorrow’s article. 

Originally posted on www.gainspainscapital.com

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Graham Summers

Chief Market Strategist

Phoenix Capital Research

Posted by Phoenix Capital Research