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Following the degradation of the United States’ credit rating by Fitch from AAA to AA+, Bitcoin dropped to $29.6k, erasing gains made after MicroStrategy’s announcement of its intention to increase its cryptocurrency reserves. Like the scenario observed in August 2011, during a similar downgrade by S&P, investors moved towards safer assets. It was, however, early in Bitcoin’s history to draw a specific conclusion to the asset. It’s important to note that two of the three major rating agencies have now assigned the AA+ rating as the default rating for the United States, while Moody’s still maintains its superior AAA rating.
Litecoin’s next quadrennial halving, scheduled for Wednesday, means that the pace of new LTC cryptocurrency units will be halved. This will be the third halving on the Litecoin blockchain since its creation in 2011, reducing the current subsidy from 12.5 litecoins (LTC) to 6.25 LTC. According to Charlie Lee, the founder of Litecoin, these disinflationary halvings promote mass adoption without sacrificing network security. Like Bitcoin, Litecoin uses a proof-of-work security mechanism, relying on miners who use computing resources to process transactions and secure the network. Miners receive rewards, a combination of variable transaction fees and a predetermined subsidy that is halved approximately every four years. Ultimately, the goal is to reduce these subsidies and reward miners primarily through transaction fees. For now, the challenge is to keep miners motivated while gradually reducing rewards. Lee assumes that since there are fewer new cryptocurrency units created, the price should theoretically increase due to a slower increase in supply. “Price is determined by supply and demand,” Lee explained at a Twitter Spaces event on Tuesday. “If supply is cut in half and demand remains the same, then the price should increase.” Remember that the next halving for Bitcoin is scheduled for May 2024.
Coinbase is considering incorporating Bitcoin’s Lightning network for payments, as part of a larger plan to offer more cryptocurrency payments to its users worldwide. CEO Brian Armstrong said on Wednesday: “We are looking into how best to integrate Lightning. It’s far from trivial, but I think it’s worth it. I’m all for the rise of Bitcoin payments. Let’s build it together.” The Lightning network is a second layer for Bitcoin that uses micropayment channels between software providers, called nodes, to speed up payments on the Bitcoin blockchain at a low cost. These channels allow two parties to lock funds on the main chain. They reduce network congestion by performing multiple separate transactions, then bundling all transactions into one when submitting to the main blockchain. On Wednesday, the total capacity of the Lightning network – the total amount of bitcoins locked for payments across all channels – was 4,686.64 bitcoins, just over $138 million at the current rate.
The US SEC reportedly asked Coinbase to cease trading of all cryptocurrencies except Bitcoin (BTC) before suing the country’s largest cryptocurrency exchange platform last month, according to a Financial Times report citing CEO Brian Armstrong. The SEC reportedly told Coinbase that every asset other than Bitcoin is considered a security, an interpretation that Coinbase disputes, receiving no explanation from the SEC on how it came to this conclusion. A Coinbase spokesperson clarified that the interview omitted critical context regarding their discussions with the US SEC. In June, the SEC accused Coinbase of operating illegally by not being registered as an exchange and also claimed that the platform’s staking service offered at least 13 cryptographic assets that should have been registered as securities. In another context, the SEC also sued Binance in June for offering unregistered securities.
MicroStrategy returned to profitability in the second quarter, thanks to a rise in the price of Bitcoin. The return to profitability is primarily due to a relatively smaller digital asset loss of $24.1 million during the quarter, compared to a massive loss of $917.8 million in the second quarter of 2022. CFO Andrew Kang said the company’s Bitcoin reserves stood at 152,800 bitcoins as of July 31, 2023. The company acquired 12,333 bitcoins for $347 million during the quarter. As of July 30, the company had purchased an additional 467 BTC, bringing the total value of its Bitcoin reserves to $4.5 billion at the current price. The company also plans to sell up to $750 million in shares for the acquisition of Bitcoin and other general company purposes.
The IRS recently clarified that income from staking cryptocurrencies must be reported as part of taxable gross income. According to tax directive 2023-14, these staking rewards, like all other forms of income (money, property, services, etc.), are now considered gross income and must be reported as such during the year they were received. This means that any income generated by staking digital assets on proof-of-stake (PoS) based blockchains must be included in taxpayers’ annual income. To calculate taxable income, the IRS specifies that the fair market value of cryptocurrency rewards must be determined at the time of their receipt, then added to the taxpayer’s annual income for that tax year.
Grayscale has appealed to the SEC to simultaneously approve all Bitcoin ETF requests. The company, which has already sued the SEC following several refusals to convert its flagship Bitcoin fund into a Bitcoin ETF, has submitted several comment letters to support this measure. A Bitcoin ETF would allow institutions to be exposed to Bitcoin without having to hold it directly. Several Bitcoin ETF requests were submitted to the SEC last month by companies like BlackRock, Fidelity, WisdomTree, and Invesco. However, the SEC has continually pushed back the approval of such an ETF for over a decade, citing concerns about the possibility of fraud and manipulation. Fidelity and BlackRock have since refined their requests to address the SEC’s concerns, including planning a surveillance agreement with the cryptocurrency exchange platform Coinbase. Grayscale insists that the spot and futures markets for Bitcoin are inextricably linked, and that existing surveillance agreements should be sufficient.
According to the crypto-asset analysis firm K33 Research, the five-day volatility of Bitcoin is currently lower than that of gold, the Nasdaq 100, and the S&P 500. This trend has rarely been observed in recent years, and whenever it has, it has preceded periods of extremely volatile price fluctuations. Over the past six weeks, Bitcoin has been moving in an increasingly tight range, its price primarily oscillating between $29,000 and $30,000. Transaction volumes have also reached historically low levels, as has activity on derivative products. Vetle Lunde, a senior analyst at K33, believes that this extraordinary period of stability could be the prelude to a burst of volatility. Upcoming decisions regarding spot Bitcoin ETFs and a judgment in the lawsuit between Grayscale, the issuer of the GBTC fund, and the U.S. Securities and Exchange Commission could act as catalysts over the next two months. However, structural forces in the derivatives market could also generate volatility regardless of any news.
Analyst Aksel Kibar has updated his own roadmap for the evolution of Bitcoin’s price, suggesting that current support levels could be more reliable than some believe. He has expressed particular interest in the $28,400 threshold, with a bullish target set at $34,000. According to him, the upward trend in Bitcoin’s price is still intact. We share this view.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of August 2nd, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
