However, there are two conditions that make ignoring the whole subject a bad idea: professional traders and miners’ revenue. “Professional traders” means someone whose primary activity is in the area of financial trading, whether it be in stocks, pork bellies, or bitcoin. These people are treated like businesses, and have to keep track of their cost basis and file detailed returns at the end of the year. Miner’s revenue is simply taxed at the market value at the time of their production (as well as being subject to capital gains when sold).[1,2]

What does that have to do with the Markets?

Several months ago, I noticed what I though looked like a trend in the relationship between bitcoin’s market share of the total cryptocurrency market, and the rest of the ‘alt-coins’. Everyone agrees that bitcoins’ dominance shrinks over time as many new blockchain tokens are added to the market, but the chart also reveals 3 drastic periodic fluctuations where the alt-coin share spikes, and then returns back to the normal slope after some time.

While there is enough variation in the onset, peak, and duration to obscure the trend, it was enough to motivate a follow-up look in 2017. If it was a valid trend, then we should see a repeat near March, extending the dip in Bitcoin’s (BTC) market share down to at least the 70% range.

So, when the 4th dip did happen this month, the elephant in the room blared its trumpet: what is causing this?

Let’s review some facts that are relevant to answering that question.

As shown above, the first important fact is that BTC dominates the industry in volume, price, and so-called “market cap”.[3] So the answer should also be dominated by that token.

Next, we find that 90% of the trading, and 70% of the mining are done in China.[4,5,6] So the answer must also have its roots in China.

Finally, we need a cause that would apply to everyone, at the same time of year. It’s no surprise then that we look to the annual tax filing, which in China, must be done before March 31st.[2] Since this is very close the the April 15th deadline in the US (and similar dates in many countries), large players there will also contribute to this trend.

While mining operations do have to sell some of their mined tokens to cover monthly expenses, it’s the end of the year where the totals add up. Combine this with the professional traders also filing at this time, and you get a serious market movement like we see in the charts above.

The total BTC mining & transaction revenue for 2016 was ~$562,000,000 [7] (70% of that — around $393,400,000 — went to Chinese miners). So 15–30% income taxes on that would move $84,000,000–$168,000,000 into the legal tender of the taxing authority of the miners.

If you bought 1 BTC on Jan. 1, 2016, and sold on Dec. 31, 2016, where the price rose from $435 to $960, you’d have a profit of $525 subject to a 15% capital gains tax of $79.00. If that were applied to the whole token market, which went from $7.1 billion to $17.5 billion in 2016 [3], would mean a profit of $10.4 billion generating $1.5 billion in capital gains taxes.

If even a fraction of these numbers get pulled from the markets during tax season, they are more than enough to cause the trend every year of the severe dip in “bitcoin dominance” (the ratio of BTC to all Altcoins). I believe that the industry players understand this, and not only make trades into alts to maintain their BTC value, but also have figured out that it’s easy for them to profit on this activity, pumping alt prices up high and then selling, and getting back into BTC at a lower price, as the crowds are not aware of this, and wild speculation & FUD (fear, uncertainty, and doubt) run rampant in the community. In many countries, trading for another (stock) re-sets your cost basis anyway, so if you’ve moved into a handful of options, you can then select which ones you’d keep or sell based on how the market responded, and keep some in these alts as a hedge.

Loose ends:

1. What happened in 2015 that was so different (earlier onset, longer duration)? There’s quite a back story here regarding the loss of value in the CNY, and capital flight concerns. [8]
2. Why is the rise in the alt-coin share so much higher this year than in past years? A few reasons. First, recent changes in regulation in China, including KYC style requirements that resulted in several Chinese exchanges putting a freeze on BTC (and Litecoin) withdrawals until March 15th.[9] Second, the other alt-coins were not subject to this limitation, so people could easily trade BTC for, say ETH or DASH, and then sell. This would seemingly only apply to foreign currencies (mainly the Dollar), as it was still possible to get CNY for BTC on their exchanges. This may amount to a grand experimental test to see how much capital flight is aided by bitcoin trading.[10] The all-time highs also contribute to this being a larger effect, and then also the fact that the ratio of market caps between BTC and Alts is not absolute — as the alt prices were pumped, and now BTC price is in decline, the ratio difference has continued to grow dramatically, though also on target for the projections. It’s not all based on value moving from one to the others. A probable loophole is that you can re-set your cost basis by trading one token for another, and then move back to the favored store of value (BTC) after you’ve filed. Remember, we have to explain the previous years’ trends too, and there was no such freeze on BTC withdrawals from the exchanges then.
3. What will happen next? If previous years are repeated, this is a bubble for most alt-coins, and a correction will take place over the next couple weeks. Of course, the fundamentals will come back into play, and better projects will fare better and recover more quickly than others.

Post script

While the focus of this article is to highlight the annual trend, there are a couple points worth making about the current situation.

• There are surely effects on the BTC market today regarding the pressure and ongoing debate over the state of that blockchain. Combined with the unfreezing date, which could be extended again, the trough could be extended considerably.
• There is surely an amplification of the annual trend coming from day traders who study these charts carefully, and would take advantage of it.

This work is for educational purposes, and will hopefully inspire further study. It is not tax or investment advice. The views given here should be considered as educated speculation yet to be peer reviewed, and are not necessarily the views of organizations the author is affiliated with.

If you found this work valuable or at least entertaining, you can show appreciation by sending BTC to this address: 1LBPf3cMbdySpgiWn8HtVfCo58mHnijRFf

References

[1] http://www.coindesk.com/irs-bitcoin-tax-guidelines-mean/

[2] https://home.kpmg.com/xx/en/home/insights/2011/12/china-income-tax.html

[3] http://coinmarketcap.com/

[4] https://www.bloomberg.com/news/articles/2016-07-06/after-4-400-surge-bitcoin-s-fate-hinges-on-huge-chinese-miners

[5] https://www.cryptocoinsnews.com/chinas-mining-dominance-good-or-bad-for-bitcoin/

[6] https://www.cryptocoinsnews.com/china-now-controls-bitcoin-thats-just-beginning/

[7] https://www.quandl.com/data/BCHAIN/MIREV-Bitcoin-Miners-Revenue

[8] http://www.zerohedge.com/news/2015-11-03/bitcoin-surges-1-year-highs-100-china-capital-controls-august-lows

[9] http://www.coindesk.com/china-btcc-exchange-halt-withdrawals/

[10] http://calvinayre.com/2017/02/17/business/btc-china-extends-bitcoin-withdrawal-freeze-march/

tl/dr: The filing & payment of annual tax returns by the biggest participants, which requires trades to local legal tender (fiat) to transact, causes large, predictable fluctuations in the market every year.

In Science, a disproven theory that just will not die, and persists in the media, pop culture, or even in poorly revised textbook editions, is often called a ‘zombie theory’.

Topping the list is traditional economic theory, and the political ideologies that have been attached to it. Truly deserving of the title of zombie, because of their built-in invocation of monsters to represent anything that opposes their desires — whether they call up the red scare, or the invisible hand.

As the Industrial Age hold-outs and their cult followings die off, new digital, networked-information age systems will take their place. Many myths have been created, and even without these new alternatives, we’ve known for some time now that the models that have been used in attempts to explain these complex systems are not worth the paper they are written on. They are used far more to mislead than to lead.

This video offers some examples of how the indoctrination of these myths has permeated through the corporate sector, which has adapted lock-step to take advantage of the information asymmetries over the past several decades, resulting in even worse problems.

“For 75 years now corporate profit, over their total value, has been decreasing. That means corporations are really good at accumulating money but increasingly worse at deploying that money, at making money with money. “

It’s interesting that at several points in the article, which I enjoyed, the word “social networks” appeared in the plural, yet only one company was named. This helps us to understand why many people in the developing countries see the word “internet”, synonymous with “Facebook”. They are being ‘educated’ that way.

There is, in this age, a better alternative than the model described here, where a centralized entity operates in the market with a monopoly, and extracts an unequal share of the wealth from it. Today we have excellent decentralization tools, and can easily and cheaply create distributed networks that break this inequality. These same networks can have their own blockchains, allowing for unprecedented automation, giving the entrepreneur a built-in team of executives, capable of executing contracts, paying suppliers and workers alike, and much more. Middlemen are replaced with Apps.

These networks respect an individual’s rights; privacy, ownership of data and content, even being able to operate in a truly democratic and sovereign attention economy, monetizing this scarce resource, and paying network members directly for it. They also eliminate the need for banks to be involved in this process.

If Governments want to help people become self-sufficient, and contributors to their economies, they should import the experts and teachers needed, and initiate free scholarships for software developers, and contribute the output of these public schools to Open Source repositories, working on connecting to, maintaining, and improving these new networks. See, for example hyperledger.org/ .

The snowball is already rolling: synereo.com, factom.org, ethereum.org, livelygig.com, maidsafe.net, magazine.backfeed.cc/, and others, with a growing host of Apps being built in collaborative fashion onto this de facto super-structure.

Having governments installing all the public infrastructure and then turning over their information economy to a big monopoly from the West like Facebook is not in the public’s best interest — anywhere.