Eight Issues that are Undermining Bitcoin Stability

Bitcoin is showing extreme volatility. The flagship cryptocurrency dropped to around $17,800 before quickly bouncing back to the $18,500 range, which is where it stands at the time of writing. (20 June 2022)

In a BloombergTV interview, Michael Saylor, Microstrategy Chairman and CEO, outlined eight issues that need to be addressed if we are to temper bitcoin's extreme price volatility.

1. No Tax Loss Trading Rule

There is no tax loss trading rule applicable to bitcoin. The Wash-Sale Rule states that, if you sell an investment at a loss and then repurchase it within 30 days, the initial loss cannot be claimed for tax purposes. In order to comply with the Wash-Sale Rule, investors must wait at least 31 days before repurchasing the same investment. This currently does not not apply to bitcoin. You can sell bitcoin at a loss and buy it back immediately and harvest a tax gain. This can't be done with Apple stock, for instance. If that gets fixed by the House Committee on Ways and Means there would be less incentive to sell for a quick profit, which can only be good for the stability of bitcoin.

2. Unregistered Crypto Exchanges

We have around 520 unregistered crypto exchanges offering 20x leverage (or more). Retail investors, encouraged by the exchanges, massively over-leverage themselves. They borrow many times more bitcoin than they actually own. The exchanges don't care - they make their transaction fees whether the customer wins or loses. It's all the same to them. If there's a sudden, sharp drop in the price of bitcoin, margin calls are triggered and the investors get liquidated. This can lead to a chain reaction of cascading margin calls forcing the price lower and lower. When the dust settles, many investors have lost everything. Then the whales move in and buy bitcoin at its new low price. As the exchanges become subject to regulation and the massive over-leveraging is curbed, that will be a big positive for bitcoin.

3. Unregistered Securities

There are 19,000 unregistered securities in the crypto space, cross-collateralized against bitcoin. Many will disappear under their own steam, or become converted to publicly-traded instruments. This can only help the stability of bitcoin.

4. Wildcat Banks

The wildcat banks, the Terras and Lunas and Celsius, create massive volatility, and, as they get regulated, or disappear, or become institutionalized banks, the asset class will mature and become more stable.

5. FUD

FUD. Fear, uncertainty and doubt. There's a lot of ignorance and fear. People think crypto is the same as bitcoin, which means they don't understand crypto or bitcoin. I see this as a massive problem. It isn't easy to understand Bitcoin, and most people don't. They believe what they hear, and believe Bitcoin belongs in the same basket as the rest of the crypto space.

Bitcoin is the only crypto currency that is truly decentralized. No person, no group of people, no corporation, no company, no government, no country, controls it. It is governed by user consensus. If anybody wants to introduce a change to the functioning of the bitcoin core network, they need the approval of the majority of user nodes. Of which there are thousands, spread out all over the globe. That makes all the difference. All the altcoins are, to a greater or lesser degree, centralized. They are, or can be, controlled, manipulated.

6. There is No Real Stablecoin

We need a 'proper' stablecoin. UST isn't a stablecoin. Tether is an opaque security no-one understands. If we ever have an FDIC-issued stablecoin (Federal Deposit Insurance Corporation), or something from a public entity that's endorsed by the SEC (Securities and Exchange Commission), that will help stabilize the crypto market.

7. Need for a Spot ETF

There's no spot ETF (Exchange-Traded Fund). (In America, at least.) It's probably only a matter of time before one is approved. That would improve stability.

8. FASB Regulations

The FASB Accounting (Financial Accounting Standards Board) is detremental. The FDIC guidance makes it difficult or impossible for financial institutions to hold bitcoin. We're waiting for clear SEC, or CFTC (Commodity Futures Trading Commission) guidance. Unfortunately the regulatory agencies are not renowned for the speed of their deliberations.

These issues will be fixed over the next decade, but not over the next week. In the meantime, volatility in the price of bitcoin is inevitable. Is it a sound long-term investment? That you have to decide for yourselves.

Michael Saylor's interview with Emily Chang: MicroStrategy's Unrelenting Bitcoin Bet

Follow Up

June 23 2022. Anthony Pompliano interviewed Max Keiser to ask his opinion on Michael Saylor's eight points. Max broadly agrees with most of Michael's ideas. But he strongly disagrees about the need for a highly regulated stablecoin. He thinks Tether works just fine as a stablecoin.

Find the interview here: How To Teach The WORLD About Bitcoin: Max Keiser