Halve you heard? Your Guide to Bitcoin Halving Events

Image for post

While the world’s fiat currencies suffer from inflation as governments print more money to manage the COVID-19 crisis, Bitcoin, by design, is becoming more deflationary with each block confirmation. This is because Bitcoin creator Satoshi Nakamoto intended for Bitcoin to be the antithesis of government-controlled fiat currencies: “The root problem with conventional currency is all the trust that’s required to make it work,” wrote Satoshi in a post on the P2P Foundation Forum, “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” In the post, dated February 11, 2009, Satoshi announces the creation of Bitcoin (along with a link to the earlier published white paper) and details its characteristics that make it anything but conventional. Among these characteristics is the fact that “everything is based on crypto proof instead of trust.”

In creating Bitcoin as a decentralized, trustless system, Satoshi ensured that it could not fall victim to the “breaches of trust” and inflation experienced throughout the history of fiat currencies. Unlike fiat currencies that are controlled and manipulated by governments and central authorities, Bitcoin follows a strict set of rules that have been embedded into its codebase or “monetary policy” since its inception. These rules include a hard supply limit of 21 million coins, the last of which will be mined around the year 2140. Currently, more than 87 percent of the 21 million bitcoin have been mined, meaning there are approximately 3 million remaining coins to be mined over the course of the next 120 years. The speed at which new bitcoin is mined and distributed is controlled by 30 precoded “halving” or “halvening” events (our Twitter followers prefer “halving”, so we’ll go with that from now on) that will take place every 210,000 blocks or about every four years until the last bitcoin is mined. In 2008 the block reward for miners was 50 newly minted bitcoin for each validated block. Following the first halving event in 2012, the block reward reduced by 50 percent to 25 bitcoin per validated block and then reduced by another 50 percent to 12.5 bitcoin following the second halving event in 2016. 2020 marks the year for the third halving event in which the block reward will be reduced to 6.25 bitcoin per validated block.

While we don’t know the exact date of the halving event (more on this below), we know it is fast approaching and is set to occur sometime this month. There’s been a lot of anticipatory chatter about the halving as people question and speculate on how it will (or will not) impact everything from the price of bitcoin to profitability and participation of miners in the network.

We’ve compiled what we consider to be the best available resources for understanding the Bitcoin 2020 Halving event and answering some of the most common questions around it.

When will the halving occur?

The answer to this question is contingent on the speed at which new blocks are created. Given the average block time is around 10 minutes and a halving event takes place every 210,000 blocks, the halving is estimated to occur on or around May 11. While there are various countdown resources that estimate within a day of one another, our favorites are the Bitcoin Halving Countdown from CoinMarketCap and the Bitcoin Clock, which “uses data from BTC.com to get the average block time for the past two months. It then uses this block time (currently 10.3125 minutes between blocks as of March 25, 2020) to estimate the halving date.”

Tell me more about the halving. What is it exactly? What is the intention behind it?

Whether you’re new to crypto or you’ve been in the game for years, we can all use a bit of a refresher when it comes to the halving event. If you’re new to crypto, we recommend starting with this video from We Use Coins regarding the need for Bitcoin and this video from CryptoCasey, which provides a straightforward explanation of blockchain technology, mining, and the upcoming bitcoin halving event. For a more humorous take on the benefits of “the currency of the future,” check out this video from Cameralla Comedy.

Running short on time? Try this episode of the 4-Minute Crypto Show, which offers a speedy, yet thorough explanation of halving events.

If you’re already familiar with the crypto basics and want more detail on the halving, this article from CoinDesk is an excellent resource. Not only does it include an illustrative explainer video that breaks down and simplifies the process, but the article also dives into:

  • the economic reasoning behind Satoshi’s decision to build the halving events into Bitcoin’s code

For additional info on previous halving events and miners’ roles in the network, Michael Sweeney from The Block provides a solid explanation in his analysis, “The bitcoin halving: what it is and why it matters.”

Interested in learning more about the economics behind Bitcoin’s monetary policy? Take a look at this article from The Block’s Mike Orcutt or this guide from Block Geeks that provides a crash course on supply and demand, inflation, deflation, and market cap as it relates to bitcoin, as well as how incentivization for miners fits into the equation. Or if you really want to get into it, Bitcoin Magazine’s Peter C. Earle explains why the 2020 halving is particularly important. He calls out the difference between the old and modern definitions of inflation, noting that in the context of the modern definition which refers to “an increase in general price levels within an economy,” the fact that “with increasing value one bitcoin buys more over time, it is indisputably deflationary.”

“What’s noteworthy about this point, Earle writes, “is that, upon this particular halving, Bitcoin ‘inflating’ at a roughly 1.8 percent rate annually will nominally — and by then, quite possibly in real terms — be ‘inflating’ at a rate lower than both the Federal Reserve target of 2 percent per year and current, CPI-based estimates of real U.S. inflation of 1.9 percent annually.”

Tell me more about the miners. How will it impact who is currently mining and who will continue to profit? Will the halving result in mining eventually becoming monopolized?

Andreas Antonopoulos tackles these questions in this short video clip and notes that we don’t need to be concerned about the monopolization of mining because the amount of profit a miner generates is not contingent on the size of their mining facility but on the smoothness of their mining operation. So while there are multiple factors that play into whether a mining operation is profitable, larger operations do not necessarily have an advantage over smaller ones. Rather, it’s all about efficiency. “Halving will increase competition in mining,” he says, and in general it will be the least efficient miners that become less profitable.

Similarly, in an interview with Anthony Pompliano the CEO of Blockware Solutions Matt D’Souza states, “The efficient miner should not fear the halving, they should welcome it.” Why? D’Souza notes that “once we go through halving the miners’ revenue is going to get slashed in half” and we’re going to experience what he considers to be “a healthy cleanse of the network.” He predicts that if the bitcoin price is still at $8k or lower going into the halving, we may experience “extreme miner capitulation” where we may see up to 40 percent of the network shutting off due to high energy costs and reliance on outdated mining equipment. He notes that as these inefficient miners begin to pull out of the network following the halving, there will be an adjustment period from May to July as the network undergoes these changes. At that point, difficulty will kick in and margins will improve for those miners who are still in the game. “Mining is about survivability,” says D’Souza, “You just need to survive. If you survive, difficulty will adjust in the future and it’s going to improve your margins because the people that are inefficient… their bitcoin is going to go to you.”

What happens to miners once all of the bitcoin has been mined and there are no more block rewards?

After the final halving event takes place and the 21 millionth bitcoin is mined sometime in 2140 miners will no longer receive block rewards, but they will still collect transaction fees just as they do currently. While we don’t know for sure how miners will react once we reach this point, according to Adam Barone in his article published on Investopedia, “Even when the last bitcoin has been produced, miners will likely continue to actively and competitively participate and validate new transactions. The reason is that every bitcoin transaction has a small transaction fee attached to it. These fees, while today representing a few hundred dollars per block, could potentially rise to many thousands of dollars or more per block as the number of transactions on the blockchain grows and as the price of a bitcoin rises. Ultimately, it will function like a closed economy where transaction fees are assessed much like taxes.”

What about the bitcoin price? How will it be impacted by the halving event?

The short answer is that there is no shortage of predictions.*

To quote Antonopoulos regarding his thoughts on price predictions: “I think it’s mostly irresponsible to make predictions about price. It’s the same as astrology and reading tea leaves.” While we agree with him on this sentiment, many people in the cryptosphere have openly made predictions about what will happen to the price of bitcoin following the 2020 halving. So, if you’re one for speculation or you just find it fun to read about people’s theories and want to be aware of what some of the most well-known people in the industry are saying, here are a few links for you to check out:

How can I watch the halving event?

For the previous halvings, it was fairly common for people to throw watch parties to celebrate the halving event. Now with current social distancing measures in place, in-person parties are being replaced by live streams. Our pick for how to watch and celebrate the 2020 Halving is Bitcoin Magazine’s 21-hour Live Stream for which they’ll be sharing updates across their social channels regarding exact timing, but you can track their countdown here.

*This content is meant to educate and inform but should not be taken as financial or investment advice. Trading and investing in cryptocurrencies (also called digital or virtual currencies, cryptoassets, altcoins and so on) involves substantial risk of loss and is not suitable for every investor.

Neobanking and the Push Toward Better Customer Service in Banking…Finally

By Rob Odell

Article originally published on ValueWalk

Image for post

While neobanks initially emerged in response to the barriers presented by traditional banks, they have become viable businesses in their own right by offering products, services, and a level of convenience that traditional banks have been slow to adopt.

Traditional Banks Slow To Respond To Evolving Customer Preferences

Though most traditional banks have worked to add new features and services, overall they have been slow to respond to evolving customer preferences. Take mobile apps for example. Most major banks today offer a mobile app that enables customers to conduct some of their banking via their phones. But these platforms often act and feel like digital extensions of their monolithic physical branches, clumsily ported onto your phone, and unable to harness the immense power that smartphones and internet-connectivity offers.

As frustrating as it is, this lack of innovation on the part of traditional banks makes sense if you consider their history. For decades, the biggest banks in the world functioned within the structure of an oligopoly and it wasn’t until fairly recently that they ever needed to worry about new kinds of competition.

While this lack of innovation has reduced the appeal of big banks among customers and has created space for the emergence of neobanks, it is not the only contributing factor to this shift in customer perspective. Unethical behavior by banks has come to the forefront in the past decade as many of the world’s biggest traditional banks have embroiled themselves in scandals and the details of those scandals have been broadcast to the public.

To name just a few, Deutsche Bank has been linked to money laundering, Wells Fargo paid a $185 million fine for creating millions of accounts on behalf of customers without their knowledge, and the financial crisis of 2007–2008 reads like a murderer’s row of the biggest names in the global banking industry. Additionally, repeated regulatory attempts by world governments to rein in unethical banking practices have merely resulted in newer, more creative ways for banks to break the rules in pursuit of profits.

It’s safe to say that this shady behavior has not sat well with customers. According to a survey by The World Economic Forum, “45.3 percent of respondents said they ‘disagree’ with the statement that they trust banks to be fair and honest.” This lack of trust in banks has paved the way for neobanks to enter the finance space, opening customers’ minds to consider alternative banking options.

Now consider some of the advantages that neobanks such as PayPal, Square, Alipay, Monzo, Wealthfront, Robinhood and Simple offer.

It starts with greater convenience. By offering a way for customers to bank from the palm of their hand, neobanks are able to avoid incurring the real estate and operational costs associated with maintaining and operating physical branches. These cost savings can then be passed along to customers in the form of lower interest rates on loans.

Beyond offering lower rates, neobanks also focus on making loans more accessible. They bring with them far less bureaucracy than traditional banks offer, enabling customers to get faster loan approval. This has also been the narrow focus for my company SALT, where digital asset-backed lending has enabled us to provide our customers with access to cash and offer competitive interest rates without having to take their credit scores into account.

Unlike traditional banks, neobanks have boomed in the time of smartphones, building their platforms with a mobile-first approach. This completely digital environment produces a user-friendly interface, driven by cutting-edge APIs.

Neobanks’ systems tend to be both highly automated and scalable. They offer open infrastructures with the idea that other creative applications can be built on top of their basic banking platform to improve their offerings. This also means they can adapt quite rapidly to a fast-changing industry. It’s far more likely to see one of these newcomers start to offer cryptoasset services before any traditional institution.

While big banks seek to own as many pieces of a customer’s financial existence as possible, neobanks understand that choice is the future of finance. By offering customers the opportunity to choose from an array of creative banking solutions, neobanks are completely disrupting the banking industry. While some companies are offering microlending, others are offering commission-free stock trading, undercutting the costs of even the lowest-price discount brokers.

Combine these offerings with FDIC-insured savings accounts, checking accounts with debit cards, ATM access, credit cards, and mobile-first features such as mobile check deposits, and customers have nearly every banking service they need in one place.

Image for post

Source: McKinsey

Even with all of these advances, neobanks still constitute a small percentage of the overall banking and financial services space, leaving plenty of room for significant growth. How that growth manifests itself remains an open question.

That question is this: Will fintech companies overtake traditional banks, or just add competition?

The answer will likely depend largely on how quickly and extensively traditional banks evolve. Historically, they’ve been slow to change, and haven’t paid the price for that intransigence. That’s because over the years, most banking customers have been fairly inert, accepting higher interest rates on loans, recursively punitive overdraft fees, and monthly account maintenance fees because they haven’t found better alternatives that they can trust.

The current COVID-19 pandemic could force change, both among banking service consumers and the industry itself. Visits to physical bank branches were already an inconvenience to customers before the outbreak of COVID-19. Now that banks are inevitably having to focus on their digital service offerings, even traditional banking customers will get to experience fully digital banking. How well their bank performs in this aspect will determine whether a customer remains loyal to their bank following the crisis, or chooses to make the switch to a neobank that can better meet their needs.

As more customers seek better banking alternatives, the younger generation will be able to teach traditional banking customers about the benefits of neobanks. From there, it won’t take much due diligence before more people realize that neobanks offer smoother platforms, better interest rates, and more flexibility than traditional banks.

If that happens and traditional banks’ market share starts to erode at a faster pace, traditional banks will be faced with the classic build-or-buy dilemma. Will they hire the best, more forward-thinking engineers to catch up to neobanks’ superior technology and user interfaces? Will they seek to acquire leading fintech companies as a way to protect themselves? Or will they remain complacent, and let fintech upstarts pass them by?

Fintech companies’ ability to grab market share will entail overcoming significant challenges, beyond just traditional banks’ huge edge in brand recognition.

Stock-trading app Robinhood suffered multiple shutdowns as financial markets crashed in early March. Chime, a leading branchless U.S. bank, has experienced multiple outages over the past year, with the company’s five million users unable to see their balances and intermittently unable to use their debit cards. Above all other banking features, customers want to know that they can access their money when necessary, so these kinds of setbacks must subside if fintech contenders want to make serious headway.

Meanwhile, regulatory complexity within countries and across regions is contributing to “winner take most” outcomes for fintech disruptors. Neobanks need to invest more in regional compliance to gain traction, rather than trying to launch globally on day one.

The landscape is changing rapidly for neobanks, and it will keep changing. Venture capital-backed startups will try to grab a big piece of the consumer banking world, but they’ll face plenty of competition. We might also see fintech firms partner and bundle services in an effort to compete head-on with the big banks.

Ultimately, the future of banking could simply come down to consumer awareness. Take my brother-in-law for example. After recently receiving a check from his grandfather, he sent it home to his parents so they could deposit it into his bank account. Although he’s highly educated and technologically savvy, he had no idea that he could deposit the check in a matter of seconds with a mobile banking app. Instances like this demonstrate that there’s still ways to go in terms of shifting consumers’ mindsets to challenge traditional banking.

It’s something that people don’t really think about, unless they work in the industry, or need to get a mortgage or some other major service from their bank.

Just as disruption has changed consumer habits in so many other industries, it will eventually do so in banking. Neobanks are better positioned to integrate with top data transfer network providers like Plaid, as they think about service through a lens that is different from that of traditional banks. As consumers become more aware of alternative banking options, they will catch on to the advantages of neobanks and inevitably make the switch, choosing to abandon their traditional bank in the process.

For the banking industry, change is already here. And more change is coming.

About the Author

Rob Odell is Co-President & Chief Product Officer at SALT where he is responsible for developing the strategic direction of the company and managing the product and marketing teams. Rob has been a Bitcoin believer since 2013 after being introduced to it by a Bali-based coffee roaster selling his beans for Bitcoin. SALT allows borrowers to use their cryptoassets as collateral to secure cash or stablecoin loans.

March Update from SALT

In case you’re not a subscriber to our newsletter, we want to share some of our favorite highlights from March right here on our blog to help keep you up to date on all things SALT. Image for post

Need something new to binge watch?

Catch up on Season 2 of Worth Your SALT to see our discussions with industry leaders including Bill Barhydt, Shira Frank, David Chaum, and many more.


CoinTelegraph: French Court Moves the BTC Chess Piece — How Will Regulators Respond?

Image for post

“France is the 7th largest economy in the world by GDP, so it certainly is likely to influence other markets, especially in the EU, initially. In such a new and emerging market and technology like Bitcoin, regulators around the world do look to how other countries’ regulators are viewing cryptocurrencies. So, any ruling France makes will be closely observed by regulators worldwide.”

— Rob Odell, co-president and chief product officer, SALT

For full text article, click here.


Crypto Chat: Q&A with Dustin Hull, Co-President & CFO, SALT

Image for post As one of Cadence’s latest originator partners, we sat down with Brian Guerra of Cadence to discuss SALT’s business and how we’re able to contribute to Cadence’s efforts to give investors exposure to private credit assets linked to cryptocurrency. For full Q&A, click here.

Finance Magnates: Coronavirus & Crypto Lending: Could the Crisis Bring New Clients?

Image for post

“Crypto-backed lenders are likely faring better than other crypto businesses during the global pandemic, as they offer a way for crypto holders to get cash without having to sell their cryptoassets.”

— Rob Odell, co-president and chief product officer, SALT

For full text article, click here.


Image for post

Updated Sign-up Process

Our 2-step verification process has been updated to make it faster and easier for you to complete the sign-up process and explore our platform. Learn more about the update by logging into your account.

Signup for our monthly newsletter here: https://cdn.forms-content.sg-form.com/76a45090-a050-11ea-8926-5efcf9d8f941

Questions about our products and offerings? Contact [email protected]

How to protect your crypto-backed loan during global uncertainty

Image for post

We at SALT want to take a moment to address the market volatility and global uncertainty stemming from COVID-19. We understand this level of uncertainty can be stressful and want to reaffirm that we’re taking the necessary steps to keep our employees and your assets safe.

Even as SALT employees have been asked to work from home for the foreseeable future, our support team will remain available 24/7. We’ve implemented our contingency plan for instances like this to ensure there will be no lapses in our customer service.

While we cannot predict what the market will do, we want to ensure you’re aware of the actions you can take NOW to protect your loan:

  • Deposit additional collateral — by depositing additional collateral now, you can lower your loan-to-value ratio (LTV) so that your loan and your collateral are better positioned to withstand a large dip in the market.
  • Add a stable cryptoasset — by adding stable assets like USDC, TUSD, or PAX or by adding gold-backed PAXG as collateral, you can offset market volatility and make your loan less susceptible to downward trends.
  • Make an additional payment — by paying down an additional amount on your loan, you can bring your LTV down to help reduce risk of liquidation.
  • Turn on notifications — if you have not already done so, we strongly encourage you to log into your account, go to your notification settings and turn on all notifications. Then log into your account via our mobile app to activate push notifications. This will help you stay up to date on the health of your loan in real time so that you can take immediate action as needed.

Taking any of the above steps will help protect your loan against market volatility. However, in the event of a severe market downturn like the one that took place on March 12, 2020, we want you to know your options for quickly restoring the health of your loan. Our blog post on what to expect when your collateral is on the decline offers additional details on how to manage your loan during a market downturn.*

Should you run into any issues please contact [email protected] or [email protected] and one of our team members will assist you. We’re here for you and happy to help.

And remember, in the midst of this global pandemic, your own health and safety should be your top priority. Here are some tips from the Centers for Disease Control and Prevention (CDC) on:

  1. How to prevent: https://www.cdc.gov/coronavirus/2019-ncov/about/prevention.html
  2. What to do if you feel sick: https://www.cdc.gov/coronavirus/2019-ncov/about/steps-When-sick.html
  3. Prepare yourself: https://www.cdc.gov/coronavirus/2019-ncov/protect/prepare.html

*This content is meant to educate and inform but should not be taken as financial or investment advice. Trading and investing in cryptocurrencies (also called digital or virtual currencies, cryptoassets, altcoins and so on) involves substantial risk of loss and is not suitable for every investor.

Introducing “Worth Your SALT,” Discussions with Industry Leaders that are Worth Your Time

Image for post

Innovative industries are driven by innovative minds. There’s an array of knowledge within the blockchain ecosystem and here at SALT, we believe highlighting different understandings and perspectives can only facilitate growth within our industry. With this in mind, we’re excited to release our newest video series “Worth Your SALT,” a platform dedicated to interviewing industry leaders and trailblazers currently shaping the way we think about technology. Hosted by SALT Co-Founder Caleb Slade, these segments feature thought-provoking discussions that uncover the stories behind these crypto pioneers and explores their vision for solving problems that aren’t yet fully understood.

In the first episode of “Worth Your SALT” we had the chance to sit down with Shira Frank, Co-Founder of Maiden — an industry-backed lab for universal blockchain education and research — to discuss the importance of humanizing blockchain. Throughout the discussion, Shira tells us about her unique background that has led her to focus on the intersection of ethics/awareness and technology. She leaves us pondering the complex relationship humans have with technology: we constantly think about the ways we’ve shaped and evolved technology, but have we ever truly thought about how it’s shaping and evolving us?

Watch the full-length version to hear more from Shira Frank on the social complexities of advancing technologies.

We’ll be releasing new episodes of “Worth Your SALT” in the coming weeks to highlight perspectives from various areas of the blockchain/crypto industry. Upcoming episodes will feature thought leaders including David Chaum, Jeff Berwick, and Paul Puey, among others.

Missed an episode? You can find the short and full-length versions here. New episodes can also be found on our Twitter and YouTube channels.

What to Expect When the Value of Your Collateral is on the Decline

Image for post

Your collateral is what protects your loan. It’s why SALT doesn’t need to perform income checks or credit checks when issuing a loan. But cryptocurrencies are volatile, so what happens if the value of your collateral begins to fall? Declining collateral value negatively impacts your Loan-to Value-Ratio (LTV) — that is the amount of outstanding principal still owed on your loan divided by the value of your underlying collateral: Outstanding Principal / Value of Collateral. LTV is the key metric SALT uses to determine the health of a loan. The lower the LTV, the healthier the loan. If the value of your collateral goes up, your LTV goes down. If the value of your collateral goes down, your LTV goes up. It’s that simple.

Image for post

Choosing your Loan-to-Value (LTV)

When choosing your LTV, the most important consideration is your risk tolerance. We offer starting LTV options of 30%, 40%, 50%, 60%, and 70%. If you go with a 30% LTV, you are choosing the safest level of overcollateralization, or cushion. With a 70% LTV, you won’t have to deposit as much crypto to begin with, but you’ll have the least amount of cushion. The higher the starting LTV, the higher the risk. Choose the LTV option that’s right for you.

What can you expect from us when your collateral declines in value and your LTV begins to rise? Lots of notifications.

If your collateral continues to go down in value, your LTV will steadily climb. As your LTV crosses certain critical thresholds (75%, 83%, 88%, and 90.91% as of the time of this writing) SALT’s robust monitoring and notification technology kicks in to help protect your loan.

  • At 75%, we give you a heads up, letting you know to monitor your loan more closely given your collateral is declining in value.
  • At 83%, we inform you that things are not looking so good, and you may want to consider paying back some of the loan or depositing extra collateral.
  • At 88%, we issue a final warning to let you know that if you don’t pay back some of the loan or deposit more collateral, you run a high risk of having your assets liquidated.
  • At 90.91%, SALT is contractually obligated to liquidate a portion of your collateral in order to prevent the lender from losing their investment.

After all, lenders wouldn’t be willing to lend the money in the first place if SALT couldn’t guarantee its safety.

How you respond to a rising LTV and warning notifications is up to you. Here are the current options:

  1. Pay back a portion of the loan — You can make a payment in USD via wire or ACH, or you can make a payment using a stablecoin instead. SALT currently accepts PAX, USDC and TUSD. With this option, you are choosing to lower your LTV by paying down the principal on your loan.
  2. Deposit more collateral — You can quickly and easily deposit additional collateral (it can be the same collateral your loan is backed by or a different collateral type that we offer). With this option, you are choosing to lower your LTV by increasing the total value of the underlying collateral.
  3. Do nothing — You can choose to ignore the warnings. If your collateral continues to decline in value, SALT may eventually be forced to liquidate a portion of your assets on the open market.

We’ve done the math to show you how each of these options impacts your assets, remaining principal, and required payment.

Image for post

Based on the above calculations, if you want to avoid any loss of assets, it’s best to respond as quickly as possible with options one or two. Otherwise, option three is available if that’s what you prefer. Either way it’s important to think through the options and know where you stand before your LTV crosses our liquidation threshold.

Keep tabs on your loan health from anywhere via the real-time LTV widget on your web dashboard or by logging into your account through our mobile app.

Image for post

It’s on us to monitor your loan health and keep you updated. It’s on you to take action (or not take action) when your collateral value is on the decline.

Crypto — Coming Into Its Own

By Jenny Shaver 

A look at indicators of industry maturity and assessing the right kind of investment risk.

Image for post

(This article is adapted from a keynote speech delivered at the April, 2019 Crypto Invest Summit.)

I often get asked, whether it’s by former colleagues, or people I meet at social events, or even my dad, “Why would people invest in crypto? It seems risky.”

Depending on your investment strategy, sure, it’s risky. But…it’s a different kind of risky than it was even two years ago.

So, what’s changed?

Crypto asset performance isn’t correlated to any other asset class. It doesn’t move with fiat inflation or commodities prices. It’s not tied to the performance of a company like a security. That inherently creates risk but also opportunity for significant gain. This is a risk that we as an industry weather and accept.

The perceived risk my dad is referencing has less to do with crypto asset volatility and more to do with the perception that the crypto industry reflects the lawless, undisciplined behavior and unbridled speculation akin to the caricature of the wild west.

This perception is inaccurate.

I was having a conversation with a colleague about this very topic and he said,

“Our industry isn’t in a state of chaos like The Wild West. Our industry is more analogous to The Space Race.”

John F. Kennedy said of The Space Race, “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”

Blockchain technology attempts to solve previously unsolvable problems. The complexity of the technology and the nascent nature of the regulatory framework, requires new and emerging expertise. It requires risk takers to set new precedents.

This pursuit has resulted in a pouring in of talent and capital which have given rise to increasing competition and meaningful industry advances. We are seeing this manifest via several indicators of industry maturity.

Broader Adoption

Despite the crypto winter, or bear market, or whatever we want to call 2018, we saw a nearly doubling of the amount of individuals who hold crypto assets. A survey published by Forbes suggests that crypto holders are skewing older and more affluent than previously thought.

UTXO analysis conducted by Delphi Digital suggests that most crypto holders who held a position longer than five years largely sold off their holdings, partly contributing to the downturn, but clearing the way for new investors seeking engagement with new types of products.

From an institutional perspective, traditional financial services and crypto financial services are converging. We are seeing validation of crypto assets in traditional companies incorporating crypto services or blockchain infrastructure.

Institutional adoption also extends to partnerships and service providers for crypto companies. Just in the past 12 months, I have seen an increased willingness of vendors and service providers to work with crypto companies. Companies who were saying “no” to providing services for us 12 months ago, are now actively trying to work with us.

Compliance

US-based crypto companies have made significant strides to create risk and compliance programs that are comparable to traditional financial institutions.

This includes a robust KYC/AML program, customer data protection standards, SOC compliance, compliance monitoring of blockchain addresses, and dedicated resources to oversee compliance programs.

As our industry attempts to navigate its purpose of removing barriers for transferring value, even regulatory barriers, compliance programs at this stage of our industry maturity, are a necessary step for broader adoption and mitigation of regulatory risk.

Insurance

Insurance has been a hot topic as of late because it’s a relatively new advancement in our industry. But it’s meaningful.

The fact that insurance providers are willing to underwrite affordable insurance policies for crypto-specific operations is a strong indicator that we as an industry are demonstrating the safety of holding crypto assets.

I urge investors to ask critical questions about the specifics of insurance programs — the coverage amount, incidents covered, and the claims and payout process and timeline.

The good news is that as our industry continues to prove itself, the competition amongst insurance underwriters will increase, which, in turn, will drive down costs.

Market Data Integrity

Our industry is dealing with our own data integrity issues just like any other high volume, high velocity industry.

Recognizing these gaps and the dependence on reliable market data to drive participation, there has been a surge of data research companies dedicated to improving the quality of market data.

The recent incident of BitWise calling out CoinMarketCap for overstating trading volumes, is a great example of our industry’s maturity in this area.

This is significant not just because companies like BitWise are expending resources to conduct due diligence on our industry’s leading data providers, but also because of CoinMarketCap’s acceptance of accountability to address the issue and improve their product.

It demonstrates that we are holding ourselves to a higher standard, and that investors will have increasingly accurate sources of information to make informed decisions.

Response to Scalability Challenges

JPMorgan announced earlier this year that it is investing in its Quorum blockchain infrastructure to facilitate payments in a more efficient manner using its dollar-backed JPM Coin.

It’s currently being piloted with a few institutional clients but is promising to revolutionize their payment processing.

To realize this potential will require blockchains to dependably support concurrent transactions at a scale that is not yet possible, or at least not yet largely practiced and tested.

Our industry is investing significant resources to solve this problem, and promising solutions are surfacing.

A second layer protocol solution, Lightning Network, is perhaps the most exciting advancement in the race for scalability.

For crypto to deliver on its potential of revolutionizing the transfer of value on a global scale, it must rise to meet the challenges of scale.

We’re working on it.

More Sophisticated Investment Products

What I see as the most exciting indicator of market maturity is the increasing diversification of product offerings.

Interest-bearing accounts are seeing promising early performance, futures and options are now available on select exchanges, as is trading on margin, and ETFs are on the near-term horizon.

What I have seen is an industry response to the unique nature of crypto assets and the needs of crypto holders. In crypto lending, for example, simply offering a crypto-backed, USD loan, does not address all market uses cases.

If 2018 has taught us anything it’s that we need products that drive market engagement in both bear and bull markets.

Our industry now offers several ways for investors to participate — directly through investing in crypto assets, less directly by offering fiat capital pipelines for interest-based products, or indirectly through investing in the growth of crypto companies and projects.

These options are allowing for a wider breadth of investor participation with varying risk appetites.

I return to the question, “Is crypto investing risky?”

When we empower a company like Charles Schwab to manage our wealth portfolio, we know there is some risk in the investment strategy but we don’t worry about them losing or mismanaging our money.

There are enough responsible companies in the crypto industry that can provide the same amount of assurance about the handling of your crypto assets. I encourage investors to seek out reputable companies and ask tough questions about their operations due diligence. Watch how companies respond to industry incidents like a hack or key compromise event. Our industry is still young and we’re still learning our vulnerabilities. The good companies will have a disaster recovery procedure that cure customer losses.

We have seen what happens when more resources are deployed to our industry. The result is more talent, innovation, and increasing sophistication that results in better products and better opportunities for investors.

Everyone wins.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of SALT Lending.

Considerations for Filing Taxes as a Crypto Holder in 2020

Image for post

Disclaimer: This article is for informational and educational purposes only and does not constitute tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors when filing your taxes.

While the tax deadline has been extended from April 15, 2020 to July 15, 2020 due to the COVID-19 crisis, it’s still a good idea to file as soon as possible, especially for those taxpayers who are expecting a refund. For crypto holders, it’s important to note that for the first time ever, this year every tax-paying American will be getting quizzed explicitly on their crypto activity. Indeed, the 2020 season will mark the first time the following question appears right at the top of the 1040 tax form:

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

This year however, federal tax forms ask about your bitcoin and other cryptocurrency activities, the latest move to more directly specify details for cryptocurrencies. The IRS is focusing on those who may be underreporting their crypto transactions or not reporting them at all.

What does this new sentence in your tax form this year really mean, and how should it impact how you report crypto in your 2019 taxes? To help understand, we asked SALT experts, along with our partners and friends at Node40TaxBitBlox and Friedman LLP.

Know Your Cost Basis

The first thing to know is that one is taxed on profit — the key figure to find out is the gain number. The most recent set of guidance from the IRS was released in October 2019 and it included a few methods of “cost basis assignment” mentioned therein. For those who aren’t accountants, this means one of a few ways to track profits and losses. Know your cost basis and what the IRS deems taxable. Most importantly, know your “gain number.”

Cost basis means the price at which you initially acquired an asset. For example, if you hold one BTC today, which you previously purchased at $9,000, and the price today is $11,000, the cost basis is that acquisition price of $9,000. So, the unrealized gain number (without selling) and the realized gain number (if you were to sell) is the net between today’s price and the cost basis, meaning in this case $2,000.

Cost basis can also mean the fair market value of the asset on the date of acquisition. For example, you received one BTC from work as compensation for services on 1/1. The value of BTC on 1/1 is $9,000. Later when you sell one BTC at $11,000, the then fair market value of $9,000 would be the cost basis, and you would realize $2,000 gain. The fair market value can be determined using a reasonable method, such us prices on any third-party independent trading platforms, as long as the same method is applied consistently for all your crypto transactions.

Loan collateral does not count as a transaction

For SALT customers, it’s important to know that your crypto held as collateral for a cash or stablecoin loan does not count as a taxable transaction unless your collateral is liquidated; a liquidation is a taxable event. If your collateral increases in value during the course of your loan term, this does not count as a gain or taxable action unless the collateral is sold. According to Friedman LLP, should you have a business loan with SALT, take note that business interest is deductible and subject to limitations (generally 30% of adjusted taxable income if the business had more than $25 million gross receipts). While interest on personal loans is generally not deductible, it may be deductible if you are self-employed and you use the loan for your own business or if you are employed but you use the loan to make other investments that generate income (the loan then becomes a business loan or investment loan).

First-In-First-Out (FIFO)

First-In-First-Out (FIFO) is the default accounting method. Your cost (the price at which you purchase a crypto asset) is calculated at the initial purchase date. So, if you buy a Bitcoin in January, another in March, and sell one in June, the “cost” isn’t from March, but January. The first “in” is the first purchasing transaction. First “out” is the first one sold. With digital currency the date of purchase and sale are clear in the coins and tokens themselves, making reporting much easier.

The aforementioned guidance from the IRS clarifies how to calculate your gain number.

By way of example: assume you purchase one BTC on 1/1 for $10,000, one BTC on 2/1 for $15,000, and then sell one BTC on 3/1 for $12,500 — your taxable gain or loss using first-in-first-out is computed by taking $12,500 of proceeds less your cost basis of $10,000 (which comes from the earliest purchase of BTC). This results in a $2,500 taxable gain.

While FIFO is the default method, the IRS makes it clear that the Specific Identification method can also be used if a taxpayer can document unique digital identifiers such as a private or public key. The acceptance of specific identification is favorable for taxpayers, as it allows taxpayers to assign their highest cost basis lots first, which in return minimizes their tax liability.

More details on this specific topic can be found over at Taxbit’s blog here.

Be Careful Using 1099s from Exchanges

If you have been buying crypto through exchanges, the exchange may have sent you a 1099-K or 1099-B form. Even if you did not receive these documents, all the 1099 methods of calculating income are still valid for you. The exchange calculates and reports gross proceeds, meaning that it is on the taxpayer to provide information on the cost they paid to acquire said assets and reported in the capital gains section, otherwise known as IRS 8949.

Specifically, form 1099-K reports gross proceeds, which the IRS interprets as income. The number reported on form 1099-K is not counted as income however, as cryptocurrency trading carries cost basis and is to be reported in the capital gains and losses section of a taxpayer’s tax return. Form 1099-B reports cost basis when available and makes it easier for you as a taxpayer to complete your required IRS 8949. Some cryptocurrency exchanges may not send you anything at all. Regardless of which form you receive or don’t receive, your responsibility as a taxpayer is to use the information to complete your IRS 8949, which reports your capital gains and losses.

Verify the Data You Receive

The crypto industry is still relatively new and while the exchanges and trading technology may have some advanced reporting features built in, the institutions built around that technology are still new. With traditional securities, there is a clearinghouse, a broker, and well-established financial statements that make it easy to determine your taxes. With cryptocurrency, many of the exchanges are still in the process of refining external reporting standards. This means that, as a user, the level of completeness in reporting expected from NYSE cannot possibly be replicated by virtually any new institutions.

According to data by NODE40, the reports generated by cryptocurrency exchanges will be incorrect for about 80% of cryptocurrency traders. We can’t fault the exchanges because there is simply no way for them to determine the cost basis of the assets you’ve been moving around. For this reason, it’s important to consider using a third-party platform that can calculate the gains and losses on your cryptocurrency as you move it from exchange to exchange or wallet to wallet.

Conclusion: Educating Ourselves is Essential

Crypto accounting and tax reporting can be daunting and complex, which is why staying engaged with news and trends is essential to understanding the evolving landscape of crypto taxation. Especially in the U.S, the IRS is taking more steps to introduce greater guidance and clarity. But without proper education and trained professionals, navigating crypto tax can be tough.

Tax preparers and investors rely on 1099 forms in traditional markets — crypto is no different. Without it, the burden of responsibility shifts to the investor, requiring them to keep track of all of their crypto activity for the year. This includes tracking every crypto-related transaction, like fair market value based on the date of purchase or sale of assets.

All of this information is vital for preparers to determine cost basis and properly calculate gains and losses. Therein lies the primary challenge. Some crypto accounting and management platforms have emerged to solve this growing industry need for smarter solutions. Industry giants need reliable, accurate and smart tools.

Because crypto remains a new field and exchanges are widespread around the world, not all exchanges report in the same method. This is why the savvy users will double check the work of the exchange, a task for which there are now new tools available. These errors can have a massive tax impact, particularly when it comes to tracking the cost of acquisition of the asset over time. Luckily there are tools that exist that can provide traders and crypto entrepreneurs with intelligent support.

Taxes are a part of life. This year hundreds of millions of Americans will be reminded explicitly of the existence of digital assets — a good thing for the industry that will drive greater awareness and adoption of cryptoassets. If you’re already a crypto hodler or trader, diligence is key to successfully filing your 2019 taxes this year. Whether you use a third-party tool or rely solely on exchanges to track the movement of your assets, it’s crucial that you know your gain number and verify its accuracy, that you review the IRS guidelines, and that you use trusted sources to educate yourself on what to report and how to go about it.

SALT Expands Lending Opportunities to Businesses in Australia

Image for post

Having participated this week in the ADC Global Blockchain Summit held in conjunction with the South Australian Government and the Australian Digital Commerce Association (ADCA) in Adelaide, SALT is actively incorporating its technology services into the burgeoning Australian market. With a particular focus on strategies and practical applications for business growth via blockchain technologies and systems, SALT spoke to the Summit’s key topics from experience intersecting business, public policy, and the regulatory environment.

Australia has demonstrated a keen interest in developing its blockchain industry. The Ministry for Industry, Science and Technology today announced a blockchain roadmap with AU$100,000 in federal funding for “regulation, skills and capacity building, innovation, investment, and international competitiveness and collaboration.” Working directly with blockchain businesses at the ADC Summit, SALT is deploying its Software as a Service packages, which allow traditional companies to easily add cryptocurrency and blockchain offerings into their product portfolio including lending technology, wallets, monitoring, and blockchain analysis. With Australia’s continued commitment to developing blockchain services responsibly, SALT looks forward to working with interested parties and stakeholders across the Australian market to bring their vision into reality.

Crypto companies looking for extra liquidity to expand their businesses, such as exchanges or mining companies, can join SALT and apply for a crypto-backed loan.

As SALT continues to grow, we remain focused on further expanding our technology products, allowing both crypto and traditional companies to integrate blockchain services into their software stacks.

Evaluating Interest-Bearing Crypto Accounts

By Zev Shimko, Jenny Shaver and Blake Cohen

Image for post

The latest offering in crypto custody is an interest-bearing crypto account. Although marketed similar to cash deposit savings accounts offered by traditional banks, the structure of this type of interest-bearing crypto product is more closely analogous to securities lending and should be viewed as such when assessing the risks associated with placing crypto in an interest-bearing account.

There are certainly benefits to interest-bearing crypto accounts — namely the ability to earn a return on a custodied asset beyond its possible appreciation value. However, those interest benefits aren’t without their own risks. Here are some important considerations when assessing if an interest-bearing crypto account might be suitable for your risk appetite*:

When opting for an interest-bearing product, your crypto assets may be commingled (where funds belonging to one party are mixed with those of a second party), and rehypothecated (practice whereby a broker or lending agent uses assets in their possession, but owned by their customer, to invest with or lend to a third party). In this structure, your funds may be taken by your custodian (acting as a lending agent), pooled with other assets owned by other customers of your custodian, and lent to a third-party. As a result, and in return for interest payments, you may forfeit several rights associated with your crypto assets. For example, you may be unable to quickly withdraw your crypto in whole or in part and you may lose, due to the commingling of your assets with assets owned by other customers, the ability to independently verify the security of your assets on-chain. Instead you may be supplied with a percentage statement or value statement regarding your interest in the crypto collateral you deposited into your account.

With a traditional bank savings account, your cash deposits may be lent to other financial institutions and vetted borrowers who have a multitude of options for generating wealth with the borrowed funds. In many cases, these traditional bank accounts are also insured and operate within strict regulatory guidelines and limitations on the collateral percentage, number of parties, among other restrictions for and to which the deposited assets can be lent, distributed, and relevered. These regulatory guidelines and restrictions prevent traditional financial intermediaries of this type from participating in some high-risk lending behaviors when it comes to their customer assets, but do not, generally, prohibit the rehypothecation of deposited assets under certain conditions. These intermediaries then cover their costs, not by the fees charged on the interest-bearing customer accounts, but through the income generated by lending and investing those assets during the rehypothecation process. While this process seems straight forward and analogous to what might happen with the crypto you deposit in an interest-bearing account, some additional crypto market specific comparison will help to highlight the difference in rehypothecated use between cash denominated and crypto denominated accounts.

While there are certainly financial institutions which take short and long positions on various currencies, the typical use case for rehypothecation in cash accounts is the lending or investment of the cash deposited directly to a third-party and not for direct speculative purposes in that asset. However, for many institutional crypto holders, the primary use case for generating returns with crypto assets is often to take a speculative position on the asset itself. An institution with a bearish view on the market, for example, may look to short sale opportunities — borrowing crypto and immediately selling it in hopes of a future purchase at a lower price to close the position. The institution will only net a profit if the value of the crypto falls below their initial sale price, which means you and the counterparty borrower are betting on opposing outcomes. As a HODLer of crypto assets, it’s important to understand the motives of each party involved aside from what traditional rehypothecation in cash accounts might suggest. This comparison highlights the operational difference in the rehypothecated use of cash deposits and crypto deposits in interest-bearing accounts and should motivate anyone seeking to deposit their crypto into such an account to carefully inspect the intended and permitted uses of the assets they plan to deposit.

Any custodian or intermediary entrusted with your crypto may be required to act in a responsible capacity either by their position as a custodian or fiduciary or by some applicable regulatory regime. However, there are still strategic and operational choices which may put your assets at risk. For companies offering interest-bearing crypto accounts, how might they be regulated? Traditionally chartered banks, for example, are regulated by the FDIC and must carry insurance and maintain fractional reserves to address withdrawal, and other requests without becoming overextended. Lending intermediaries are also often required to maintain capital reserves to cover risk exposure of defaults in capitalized accounts and through bonds or other insurance policies.

Given that crypto regulation is scant, the savvy crypto account holder may want to make a detailed investigation of how and through what methods companies offering interest-bearing crypto accounts have structured their risk mitigation. For example: Does the company carry insurance for your assets? What is the claims process in the event of an incident? In a relatively nascent industry, transparency of risk mitigation protocols should be table stakes for any interest-bearing products. In addition to the primary lender or custodian involved, downstream market participants face similar responsibilities as any loss throughout the ecosystem may lead to direct counterparty effects.

As an extension of assessing operating risk, a savvy account holder should also understand how counterparty risk is being mitigated and which or what counterparties may be involved. When it comes to borrowers of your crypto assets, who are they and how have they been vetted for their own operational risk? Should a third-party default on their obligation, what are the implications for your account? For loan agreements, it’s important to know how they are being structured to mitigate default risk. For example, in securities lending, borrowers are often required to post collateral. In this case, it’s important to understand what the lender is doing with the collateral and how the collateral account is being managed. Is the collateral itself being rehypothecated to earn additional returns? If so, what are those direct or indirect investments and how risky might they be? Transparency and accountability are key and so is a keen eye for the fine print.

Since all-time highs, the price of Bitcoin has dropped roughly 80%, with the largest recent weekly drop of 22% and one-day drop of 12%, both in November 2018. Heightened volatility is no stranger in the cryptocurrency world as the market can turn meaningfully in a period of days, or even hours. It is important to take note of an extended lock-up period (or simply a delay in withdrawal) associated with any interest-bearing deposit account as any delay in or restriction on your ability to liquidate or transact your assets may subject you to additional market risk. Alongside normal course market volatility, an increase in borrowing crypto for the purpose of a taking a short position, especially if undertaken by a large subset of holders in a particular asset, may potentially exacerbate any downward pressure on price, heightening lock-up risk through increased intensity in negative peak volatility.

Before depositing crypto into an interest-bearing account, take a look at the fine print. Returns initially quoted may carry restrictions on the period of time they are available, may require additional deposits or transfers, and may have additional caveats regarding market conditions and other impediments. It is important to understand the process and any notice requirements or promises made by your lender or custodian for any changes to the quoted interest rate. Depending on the size of the custodian or lender, interest bearing accounts which carry guaranteed interest rates may require significant cash outlays by the custodian or lender as a cushion for the quoted returns. Understanding the custodian’s cash and balance sheet position may also be important depending on the amount of crypto being deposited.

There is a place for interest-bearing accounts in the crypto ecosystem and as the market matures so will the terms and safeguards associated with these accounts. In the meantime, you must seek transparency for how your funds may be distributed and how risks are being mitigated. It’s important that you request adequate information, and that you handle your crypto assets with a full understanding of the risks and tradeoffs. Happy HODLing.

  • None of the information contained in this post should be taken as investment advice or any suggestion for or against the suitability of any interest-bearing, custody, or other crypto currency product for any investment, diversification, or market strategy. Salt does not offer investment advice. Please speak to your advisor, tax accountant, and/or legal counsel regarding the suitability, risks, and legality of any crypto market position or strategy. Salt is not a bank and is not FDIC insured. Please see www.saltlending.com for additional information, references, and disclosures.