January Newsletter

Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.

By Drew Feliciano and Michael Vescera

FAL Consulting

FAL Consulting is a cryptocurrency consulting company. We provide a wide variety of services related to cryptocurrency and blockchain. You can find a full breakdown of our services at cryptofal.com.

About the Newsletter

The FAL Cryptocurrency Newsletter is a monthly newsletter that focuses on the monthly highlights throughout the cryptocurrency and financial technology (FinTech) industries.

Coins to Follow

Bitcoin

Bitcoin is the first cryptocurrency and the largest by market cap. Created in 2009, Bitcoin has grown astronomically since its launch and continues to lead the cryptocurrency industry while also often dictating overall cryptocurrency market movement. It also established the norm of using blockchain as a public ledger for tracking cryptocurrency transactions, providing a revolutionary level of transparency that the broader financial system has lacked.

BTC has spent much of the previous month losing market dominance, sitting at 39.5% at the time of posting. With altcoin dominance moving up and ETH dominance holding fairly steady, BTC is finding itself in a strong period of consolidation, holding support above $45,000 in the past few weeks. On the weekly chart, the MACD and the MFI are both trending downwards, which could mean we could see it continue to test support, or even break support and move downward. It should also be noted that with Covid-19 cases on the rise, markets may experience some volatility, and the crypto markets are not necessarily immune from this.

Ethereum

Ethereum is the second-largest cryptocurrency by market cap. It’s known for being the first cryptocurrency to introduce smart contract capabilities on its blockchain, setting the precedent for ecosystem coins into the future. As the most actively used blockchain, Ethereum has established itself as the largest ecosystem coin by market cap. Many other tokens are based on the ERC-20 protocol on Ethereum’s network.

Ethereum dominance has dipped slightly over the past month, although it has been holding fairly steadily in comparison to BTC’s downward trending dominance over the past couple of weeks. This can be seen fairly clearly on the ratio chart as ETH continues to develop higher lows in its ratio to BTC. It is currently testing resistance that has not been tested since May of 2018, which is a pretty big deal. With ETH holding fairly steady and potentially preparing to continue its uptrend, it isn’t too surprising that the altcoin space is booming while BTC coils fairly neutrally.

On the USD side, you can also see how ETH is outpacing BTC in its attempted recovery. While BTC holds, ETH is making an attempt at a slow, but more definitive uptrend, especially on the daily chart and shorter-term time frames. On the weekly, there’s a clear difference between BTC and ETH’s downtrends, with BTC having a significantly more steep downtrend. Altcoins such as ETH and others are starting to hold higher lows in their ratios to BTC.

Loopring

LRC is an ERC-20 protocol that’s intended to be used for building DEXs. It is a layer-2 protocol with its own swap that allows for efficient, and low-fee swaps in comparison to layer-1 based swaps that are often both costly, and less efficient. Loopring wants to combine the centralized version of order matching with the features of decentralized blockchain-based order settlements. It is a “zkRollup Layer2 for Trading and Payment,” according to their website. It is able to batch-process requests off-chain, which allows for a more efficient and quicker transaction. This allows for more transactions to occur per second. It’s able to settle about 2,025 transactions per second.

LRC has had a successful few months. From achieving exponential new all-time highs to a partnership with Gamestop, the project has made some strong progress recently. Its partnership with Gamestop is a pretty big deal for both Loopring as a project and Gamestop as a company. It’s been rumored that they are working on an NFT exchange together that could be released soon or could be officially announced sometime soon.

One of the aspects that they have been rumored to need for this exchange is access to LRC’s new layer-2 counterfactual wallets. This feature was rumored to drop around or at the same time as the exchange, so we could see the exchange launch soon. This wallet has limited features, but it is capable of being deployed on the layer-2 LRC to avoid heavy gas fees.

On the technical side, LRC has been consolidating fairly strongly in its dollar value. LRC has developed strong support above $1.80 as it consolidates. Both the MACD and the MFI are fairly neutral currently. Volume has also settled substantially over the past couple of months.

Cardano

Cardano is a layer-2 proof-of-stake blockchain protocol. It is an ecosystem token with the ability to host smart contracts, as well as other tokens and decentralized applications in its ecosystem. Since it’s a layer-2 ecosystem protocol, it’s been often thought of as one of Ethereum’s closest decentralized competitions. Founded on peer-reviewed research and material, ADA has the highest percentage of its circulating supply staked. This helps improve network security as well as decentralization. Cardano aims to, “exists to redistribute power from unaccountable structures to the margins - to individuals - and be an enabling force for positive change and progress,” according to its website.

Months after ADA released its smart contract capabilities, Charles Hoskinson, the founder of ADA, is setting sights on developing its decentralized application ecosystem. They are attempting to find a sweet spot in the programming language that they use, between BTC’s highly secure yet restricted programming language and Java Virtual Machines’ versatile yet less secure one. One of the things they’ve been working on is their DEX solution, Sundae Swap. This DEX will allow users to exchange tokens built on Cardano. They are also working on an AI-powered marketplace called Singularity that is very sought after.

On the technical side, ADA is testing a long-term area of support on the weekly candle chart. The MACD is attempting to swing upwards and the MFI is attempting to trend downwards. It’s very likely that ADA may continue to test support until BTC or ETH make a more concrete recovery. Either way, this support has been time-tested and seems to be fairly strong. With ADA having the highest percentage of its circulating supply staked, it’s not surprising that support tends to hold pretty well in large sell-offs.

Algorand

Algorand is an ecosystem token with the ability to create smart contracts. It has its own DEX, governance capabilities, and its goal of working towards layer-2 smart contracts, Algorand is an ecosystem token that seems ready to take on much of the ecosystem space. It uses multiple layer-1 chains to help fulfill both its smart contracts as well as its transactions. This also allows for independent tokens to be built on its network, making it a true ecosystem token. These factors have attracted a diversity of investors and interest from institutions alike to the project.

Algorand has turned out to be a well-supported project with a fairly broad ecosystem. While their developers work further towards layer-2 smart contract solutions, ALGO has its own DEX, governance solution, and it is working on a bridging solution now too. Algorand recently provided a grant to Glitter Finance in order to create a multi-chain bridge solution.

According to Algorand’s website:

“The grant award will facilitate the creation and development of a cross-chain bridge between five blockchain ecosystems, Algorand, Solana, Cudos, Terra, and Polygon. Glitter Finance will first create a bidirectional bridge between Algorand and Solana. Glitter Finance specializes in the development of AI solutions on the DeFi ecosystem to transfer, which enables traders to trade their digital assets across various blockchain networks with ease, without the assistance of middlemen or intermediaries.”

This is a pretty big deal for Algorand users as it will allow them to trade their assets across different blockchain protocols.

On the technical end of things, Algorand is continuing an uptrend it started at the end of December. Both its MFI and MACD have swung up significantly on its daily candle chart and look as if they could keep going. It should be noted that the MFI is now in overbought territory. With altcoin dominance continuing to rise as investors start to become more educated about the projects they’re investing in, it wouldn’t be surprising if Algorand kept fighting to push upwards.

Features

Why Should We Care About Market Cap Dominance?

The cryptocurrency industry has plenty of data and metrics that can help traders, developers, and consultants alike. From the information that the blockchain records, to information from technical indicators, there’s a wide array of tools at our disposal as investors, traders, and content creators. Two of the most common terms you’ll hear are market cap dominance, as well as ratios. In crypto, you’ll often find people referring to market cap dominance and ratios to BTC or ETH.

So what makes these so relevant/important?

First, let’s define these terms. Market cap dominance uses the total overall cryptocurrency market cap as the hard total. Then, it looks at what percentage BTC’s market cap makes of that total, what ETH’s market cap makes up, and what the total market cap of altcoins make up (this can either include or not include Ethereum). So, when you hear BTC dominance, what they’re referring to is the percentage of the overall cryptocurrency market cap that BTC’s market cap makes up.

So now that we know what market cap dominance is, why is it so important?

Market cap dominance helps provide an idea of where the money entering the space (or leaving) is going. When BTC dominance moves up, that means BTC is taking up a larger portion of the overall market cap, which means it may be outpacing ETH and altcoins. This can also happen in the reverse way where BTC dominance percentage may be dipping (from 40.8% to 40.4% for example) as altcoin and/or ETH dominance is increasing. This would mean that altcoins and/or ETH are outpacing BTC. This tells us that currently, altcoins or ETH are potentially either yielding more gains than BTC (outpacing it) or BTC is taking more percentage losses than altcoins/ETH. Market cap dominance can be followed on both shorter-term trends as well as longer-term trends.

One of the reasons we look at this in the longer term is to see where longer-term trends of money inflow have been going. This helps show us how strong these patterns of money inflow are over time. Longer-term patterns tend to be much stronger than shorter-term ones.

These types of market cap dominance are great when looking at BTC, ETH, and altcoins as larger categories of dominance. But how would you isolate a specific token’s movement from that of larger market movement dictated by BTC or altcoin market movement dictated by ETH and/or other altcoins?

The best way to isolate a coin's movement from that of the broader market is to look at its ratio to BTC and sometimes even ETH. Oftentimes, BTC and ETH dictate the broader market movement. This means for a large portion of the time, altcoins will follow BTC and ETH movement with fairly similar percentages (in either direction). Some of the time, certain coins may outpace either BTC, ETH, or both. One of the most useful ways for telling if a coin is outpacing BTC or ETH is to check the ratios.

At FAL, we use Tradingview to check ratios. You can check a ratio by going into the Tradingview chart section and typing in token ticker/BTC or token ticker/ETH. These charts directly show the price in BTC or ETH of that specifically chosen token. When you see the price in BTC or ETH go up on these charts for a specific token, this means that that coin is outpacing BTC, or gaining higher percentages in returns. These altcoin to BTC ratios will often move together to an extent. So when a large portion of altcoins start to outpace BTC, you often will see altcoin dominance increase. When this happens, BTC dominance will often decrease (depending on whether or not ETH dominance is included in your metrics of altcoin dominance). Sometimes altcoin dominance can increase when it does not include ETH as well, this often will mean that ETH is holding steadily and altcoins are outpacing it.

It’s important to remember that both dominance and ratios are only partial factors in identifying market trends. They should not be the sole deciding factor in making an investment decision (this is not financial advice).

US Taxes and Crypto

Cryptocurrency still operates in a regulatory grey area in most jurisdictions. The US is one of these jurisdictions. However, there is one federal agency in the US that has some pretty clear parameters on how cryptocurrency should be handled, and that’s the IRS.

Cryptocurrency gains made in the US are subject to capital gains tax. This means that cryptocurrencies are treated similarly (in the eyes of the IRS) to traditional securities, even though many in the space believe this is an inaccurate tax model for the new asset class. Of course, not all cryptocurrency-based activities are taxable events, so it’s important to have an idea of what’s taxable and what isn’t.

It should be noted that this is not tax advice. For that, you should see a certified tax representative.

To start, what does the IRS consider a taxable event?

According to cryptotrader.tax:

“A taxable event simply refers to a scenario in which you trigger or realize income. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:

1. Trading crypto to fiat currency like the US dollar
2. Trading one crypto for another cryptocurrency
3. Spending crypto to purchase goods or services
4. Earning crypto as income”

In situations where you sell your cryptocurrency into fiat, the difference between the market value (in USD) you purchased it at, compared to the market value you sold it at is what determines what is taxable as a capital gain. So, if you purchased 1 BTC for $45,000 and sold it for $50,000, that $5k in profit is a taxable capital gain. If it sold for a loss, you can actually report this as a capital loss as well. For example, if the buy price was the same, but the sell price was at $40,000, that capital loss will reduce your taxable income. It should also be noted that the amount of time it is held will influence whether it is a short-term capital gain or a long-term capital gain. Shorter-term trades held for less than are taxed at a higher rate.

It should be noted that the amount of time you held it as well as your tax bracket will affect your actual tax rate for that taxable event.

When you trade cryptocurrency for another cryptocurrency it is also considered a taxable event. It is based on the USD value that you purchased it at and the US dollar value that you traded it into another currency in. So if you purchased $40,000 worth of BTC, and then it grows in value and that is traded for $45,000 worth of ETH, that $5k will be treated as a capital gain. For this type of trade, it’s the same rules as trading into fiat, which means that a capital loss can be recorded as well. This is considered disposal by the IRS. It should also be noted that shorter-term trades will be taxed at a higher rate here as well.

One of the most controversial taxable events is when cryptocurrency is spent. When cryptocurrency is spent, you will still be subject to capital gains tax on any capital gains made from its initial purchase, to when it was spent on something. So if you bought BTC at $4,000 in 2020, and then sold it for $50,000 in 2021, that’s a taxable capital gain of $46,000. Even though it was spent to purchase something, the IRS still considers this a taxable event if the USD value of that BTC increased from its initial purchase. It should be noted that with this example if it was held for at least a year, the tax burden would be less than if it was held for less than a year. While many in the space believe this to be detrimental to the use-case of cryptocurrencies, unfortunately in the eyes of the IRS this would be a taxable event.

Lastly, receiving cryptocurrency as income is another taxable event, however not as capital gains. It’s taxed as income. This is based on your income bracket.

Cryptotrader.tax created a useful breakdown of different types of “income” in the cryptocurrency space.

“The ordinary income you receive from mining, staking, interest accounts, or perhaps crypto you received as payment from a job get reported on different tax forms, depending on the specific situation.
Schedule C - If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C.
Schedule B - If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.
Schedule 1 - If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.”

There are some types of cryptocurrency interactions that are not taxable events. Purchasing cryptocurrency and holding it is not a taxable event. Just like with other assets that are taxed as capital gains, the taxable event will not occur until it is sold.

Another type of non-taxable event that is more specific to the cryptocurrency space is when you send cryptocurrency from one wallet to another. When you send your BTC, ETH, or any other cryptocurrency you will not incur a tax burden.

These are all important things to keep in mind. However when doing your taxes, if you’re an active cryptocurrency investor who has participated in taxable events, we recommend using a tax service such as TaxBit. These services connect to a variety of exchanges and will tell you what you owe and provide you with the document/s you need for reporting cryptocurrencies on your taxes. These services are some of the safest, and most accurate ways of determining what you may owe (if any) in taxes based on your cryptocurrency transactions for the year.

AVAX Has A Strong Month

by Michael Vescera

The so-called Ethereum killers have been taking off this year with the biggest gainers, Solana and now Avalanche, having made their way into the top 10 by market cap.

What makes AVAX unique is that it is a heterogeneous network of many independent blockchains. This allows it to be very efficient with ~10,000+ transactions per second and low fees. Essentially it allows everyone to have their own chain instead of one main chain, like Ethereum, that sees gas fees rise when there is an increase in traffic on the network.

While scaling solutions like Polygon and Loopring are growing rapidly to support Ethereum it may not be enough to keep other layer-1 blockchains from eating away at the market share. Avalanche has also been making headlines for its partnerships and integrations with some big names in crypto and even a nod from the banking giant, BoA.

The most important integration for AVAX was that one of the biggest stablecoins by market cap was launched on the Avalanche network. There are now seven blockchains that support USDC including Stellar, Algorand, and Solana. When the announcement was made public it caused the price of AVAX to jump by about 16% the same day. This allows AVAX users to have access to a trusted and regulated token for their swaps, transfers, lending, or borrowing. This integration is also big news for future decentralized exchanges that are built on AVAX as it gives users the ability to move their trading profits into a non-volatile asset to keep liquid capital.

Bank of America has commended Avalanche’s ability to scale while remaining secure and decentralized making it a viable alternative to ETH. This is because of their sub-net capability or the ability to have networks inside other networks. What makes this beneficial for a company like Visa, for example, is that now their network is only processing Visa transactions instead of being lumped together with the transactions of MasterCard and Discover at the same time. This is where Ethereum runs into a congestion issue and gas fees skyrocket because all the transactions happening on Uniswap, Opensea, and all the other dApps built on Ethereum are being processed on the same network at the same time.

Developers have been looking for a network that they can build on and not spend large amounts on fees just to start building an app. Another benefit of Avalanche is that if you know Solidity, the Ethereum smart contract coding language, then you can build those same Dapps on AVAX. The primary network on Avalanche is called the contract-chain or C-Chain. The C-Chain runs a fork of go-ethereum called coreth that has the networking and consensus portions replaced with Avalanche equivalents. This leverages the Ethereum Virtual Machine (EVM) that runs these smart contracts and from that, you get a blockchain that can run all the smart contracts that ETH can but with less transaction bandwidth and faster transaction finality.

The future for Avalanche is very promising and it will be interesting to see how far up the top 10 by market capitalization list it can go. The subnet capability is a really innovative approach to scaling a blockchain network. Similar projects such as Hedera Hashgraph and HoloChain which are Directed Acyclic Graphs (DAGs) are blockchain alternatives that are basically run on subnets as well.

The difference with AVAX was highlighted earlier in the fact that developers who know ETH’s Solidity will be able to seamlessly build the same thing on AVAX without having to learn a completely different coding language. That is one of the barriers keeping developers from leaving Ethereum since it is not easy to learn a new language. A lot is going on with Avalanche behind the scenes as their roadmap lays out some cool things they are working on the past quarter in cross-subnet capability as well as subnet validator rewards.