Over the past 7 days, the FS CryptoFX Agg Index increased by 0.1%, compared with a 1.3% decrease for the S&P 500. (Slide 6). The best performing size-based index was FS CryptoFX 10, which was up 0.3%. The worst performing size-based index was FS CryptoFX Eq Wt, which was down 1.3%. The best performing sector index was FS CryptoFX Platform, which was up 3.5%. The worst performing sector index was FS CryptoFX Exchange, which was down 2.9%. Bitcoin is down 4.8% for the past 7 days.
Cardano Upgrades Staking
Cardano (ADA) has completed a hardfork upgrade that transitions the network to its new proof of stake (PoS) consensus protocol. Cryptocurrency staking is all the rage these days as some assets with these features have seen significant price outperformance this year. Investors have flocked to networks like Tezos which is up 127% YTD compared to Bitcoin only up 34%.
Meanwhile, top exchanges like Coinbase, Binance and Kraken have added “staking as a service” offerings. These services have made it easier for non-technical crypto users to collect staking returns by participating in network consensus – which likely contributed to coin demand. In the simplest terms, the economics of the staking process consist of holding a certain amount of coins and receiving more over time. For this reason, many have classified staking returns as “yields” drawing similarities to owning a bond. But the risks are much different. Owning a bond does not come with the same principal price risk (assuming no default and you’re repaid at par). With staking coins, if the underlying asset goes the other way investors may be left holding the bag – even if they’ve collected a nice ‘yield’ along the way. But the market has been on investors’ side thus far this year largely offering staking returns and price appreciation.
This is likely fresh in the minds of investors who are looking for a repeat of Tezos’s success. According to the staking return calculator on Cardano’s website, users may expect to earn approximately a 10% nominal return annually in ADA by staking their tokens. We think it’s important to not underestimate the power of flows over fundamentals at this stage in the crypto markets development – and believe some retail investors who find staking returns enticing may jump on the Cardano bandwagon simply for that reason – but we also remind them to make sure they understand the fundamentals and associated risks.
Upcoming IRS Meeting Could be a Step Towards Regulatory Clarity
On the regulatory front, the IRS has called for a meeting with cryptocurrency companies and their proponents, set to take place on March 3rd in Washington DC. According to Bloomberg Tax, the meeting will feature panels on technology updates, issues for cryptocurrency exchanges, tax return preparation, and regulatory guidance and compliance. Overall, we view this meeting as another positive step towards greater regulatory clarity and with it, a better environment for making longer term investment decisions.
Taken in conjunction with the agency’s addition of its “did you receive, sell, send, exchange or otherwise acquire” crypto question to its form 1040 in 2019, we see two main takeaways. First, the IRS is serious about reducing crypto related tax evasion. Second, the current tax regime is not set in stone. We see a possibility that the IRS could reconsider its current approach, whereby all transactions are treated as taxable events, and allow for a de minimis exemption for low value cryptocurrency transactions in day-to-day use; a positive for increased adoption.
