In one line: we don’t suggest closing long positions at the moment.
We have previously written that 2014 might be the year when regulators make their mind up how to tax bitcoins and that Singapore has already made a call on Bitcoin. Right now, more news supporting that is coming from the U.S. where the move by Overstock to accept bitcoins has possibly made the tax issues related to Bitcoin all the more visible.
On Jan. 10, Patrick Byrne, the CEO of Overstock, a U.S. online retailer, tweeted:
Bitcoin's first full day on overstock.com was a huge success: 840 orders, $130,000 in sales. Almost all new customers.
Overstock might prove to change the way the Bitcoin issue is perceived by the U.S. Internal Revenue Service (IRS). Kelly Phillips Erb, a contributor to the Forbes blog argued in her yesterday post that Overstock, with over a billion dollars in annual sales might up the pressure on IRS to issue some guidance sooner rather than later.
The way the IRS will treat Bitcoin is of great interest to investors. On Jan. 7, in our Bitcoin commentary, we reported that Bitcoin could be treated as a capital asset (23.8 percent tax rate in the high-income bracket) or a currency (39.6 percent). There is a pretty wide gap between the two approaches.
Since bitcoins are not generally accepted as money, the speculation is that the IRS would come to choose the capital asset treatment. On the other hand, the possibility to pay with bitcoins at Overstock, Zynga or other businesses seems to promote the currency treatment. It is also possible that a more complicated approach would be proposed, as was the case in Singapore.
Either way, it seems that if other businesses follow in Overstock and Zynga’s footsteps, the IRS will definitely feel the need to provide the customers, businesses and investors with guidance.
The IRS decision is yet to be seen. Right now, we’ll see what’s happened with bitcoin since our last alert was posted.
Yesterday, bitcoin went 1.8% down from the Sunday’s end-of-day price. The move itself took place on moderate volume (btc 9,667.14), very similar to the volume levels we had seen in the two preceding days. This is not bearish news, particularly if we take into account the fact that the currency recovered from a low of $880.11 to 923.10 yesterday.
Today (this is written at 7:00 a.m. EST), the trading has been calm so far with the volume currently at btc 2,153.17. Up to this point, it seems that the action has been winding down (of course, the day is still very young and anything can happen).
The moves yesterday and today don’t seem to invalidate the bullish outlook. A move lower on low-to-moderate volume today wouldn’t either.
There have been no great changes and bitcoin is still going back and forth between $800 (dashed red line on the chart, which line is also our stop-loss level) and $1,000-1,100 (which coincides with the solid green line). If the price breaks below $800, the situation could turn bearish. A move up to $1,000, however, could reinforce the bullish outlook and a further move to $1,200 could be seen.
Based on the fact that the volume today has been tiny, the overall volume seems to have stabilized and the recent action has been to the downside, we are of the opinion that a move up could follow. Exposing oneself to small moves down might be profitable if the next big move turns out to be up.
Summing up, bitcoin has been moving down, but the move has been on moderate volume, which in our opinion doesn’t change the short-term bullish outlook.
Trading position: long, stop-loss at $800. At this time, we’re waiting for any spikes in volume before we suggest closing longs or readjust the stop-loss level.
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Regards,
Mike McAra
