Going by the handle “@bkiepuszewski,” one X user contends that the transaction processing speed (TPS) metric analysts rely on to measure how fast a blockchain network like Ethereum or the BNB Chain processes transactions is flawed.
Laying out reasons on X, the decentralized finance (DeFi) researcher is convinced that using an alternative metric, the User Ops per second (UOPS), could paint a clearer picture of how well a blockchain is utilized at all times.
Measuring Network Utilization
Typically, blockchain utilization measures how much a given network, for instance, Bitcoin or Ethereum, is being used at a given point. This is critical because it can be used to measure adoption levels since those with higher utilization rates tend to have a broader, active base, which can make it successful over the long haul.
To gauge activity, this metric considers the number of transactions processed every second when dealing with simple transfers or the total value locked (TVL) when dealing with smart contracts deployed.
As of November 1, the average network utilization rate in Ethereum, based on Etherscan data, is around 50%, down from about 100% registered in 2021. Meanwhile, the Bitcoin Transactions Per Day as of early November stood above 433,000, a nearly 2X increase from late October.
Usually, in the case of Bitcoin, considering it is a transactional layer, whenever prices rise, more BTC-related transactions are expected as users hope to increase the emerging trend.
Whether the UOPS system will be adopted in the long term remains to be seen. However, what’s clear is that the UOPS will consider the number of user operations that the network in question can process every second, all while factoring in the level of complexity of that transaction.
Out of the UOPS, analysts will instantaneously know how well the blockchain can handle user load without the risk of congestion, as usually is the case in Ethereum when markets are trending higher.
The Rise Of Ethereum Layer-2s
At the same time, according to @bkiepuszewski, using UOPS instead of TPS brings clarity considering the widespread use of layer-2 solutions, including OP Mainnet, Base, and StarkNet, which bundles transactions offline before confirming them on the mainnet as a single transfer. The more dapps choose layer-2 solutions, the more flawed blockchain throughput calculation will be if TPS guides.
Presently, more developers are opting for layer-2 as their base to avoid scaling issues while accessing the latitude to deploy intensive dapps such as social media platforms, as seen with Friend.tech. According to L2Beat, Arbitrum and OP Mainnet have TVLs of over $6.5 and $2.9 billion, respectively.
Ethereum venture capitalists (VCs) are “not stupid” and know that investing in the world’s largest smart contract platform won’t result in the “multiples” they desire, according to a crypto user. Going by the handle R89Capital, claims that VCs are now looking at Ethereum layer-2 assets as vehicles to exit the market, dumping “Ponzi tokens.”
Ethereum VCs Exiting ETH For “Ponzi” Tokens?
The user opines that the primary reason why ETH prices may not surge in multiples like emerging tokens, including meme coins like PEPE, for instance, is because of the relatively large market cap.
According to trackers on October 31, ETH has a market cap of over $215.8 billion and is the second largest after Bitcoin (BTC). Typically, coins with higher market caps are harder to manipulate and usually have found more institutional adoption than emerging tokens.
This is because projects with higher market cap are more liquid, have more name recognition, and have seen more adoption. Even so, while they are easier to buy in the second market due to the higher levels of liquidity, they tend to be less volatile than low market cap tokens.
These low-market tokens can also be held for speculative reasons primarily due to their upside potential, especially in trending markets. This means that low-market tokens, regardless of the issuing platform, appeal to profit-seeking speculators, not due to underlying fundamentals.
R89Capital aligns with this preview to allege that VCs, looking to recoup their investment, are launching Ponzi tokens on general-purpose layer-2 platforms before dumping them for ETH and eventually exiting for USD.
In this case, Ponzi tokens, as claimed, are low-market coins that can be meme coins or other well-marketed projects. These tokens have higher upsides, are liquid enough, and can be sold for ETH in layer-2 decentralized exchanges or popular ramps like Binance or Coinbase.
The Ethereum Technical Debt: Scaling Remains A Big Issue
Still, R89Capital didn’t mention which layer-2 projects are “Ponzis” but said the primary reason ETH is capped is due to Ethereum’s technical debt.
Over the years, Ethereum developers have been launching new products and scaling solutions, of which the transition from a proof-of-work to a proof-of-stake system and adoption of layer-2 solutions stand out. Even so, scaling remains a challenge impacting user experience, especially when token prices begin rallying.
It is not unusual for gas fees on Ethereum to spike to double-digits in a bull market, discouraging deployment while catalyzing migration of some transactions to competing platforms like Solana or layer-2 scaling solutions like Base or Optimism.
In a chilling development on Halloween Day, the crypto community was hit with disturbing news as PeckShield, a renowned blockchain security company, revealed a series of rug pulls over the past few hours.
Rug pulls, a form of cryptocurrency scam, involve sudden and deliberate value drops in specific tokens, accompanied by the perpetrators swapping the native tokens for Ethereum (ETH). The meme coins affected by the rug pulls were identified as MEME, MEMEPAD, and TITANX.
Multiple Rug Pulls Shake Crypto Market On Halloween
According to PeckShield’s X (formerly Twitter) post, the MEME token on the Ethereum blockchain experienced a jaw-dropping 100% drop in value. The address 0xBd72…5871 was responsible for swapping a staggering 4,854,740,126,240,000 MEME tokens for approximately 43.68 ETH.
It is important to note that the rug pull token shared the same name as the legitimate MEME token, adding to the confusion.
Similarly, the MEMEPAD token on Ethereum suffered an identical 100% value drop. The address 0xBd72…5871 conducted a swap of 4,854,740,126,240,000 MEMEPAD tokens for around 44.84 ETH.
Once again, the fraudulent crypto rug pull shared the same name as the genuine MEMEPAD token, compounding the deceitful nature of the scam.
Additionally, the TITANX token launched two days ago, October 28, on Ethereum experienced a staggering 100% value decline.
The address 0xBd72…5871 executed a swap of 4,854,740,126,240,000 TITANX tokens for approximately 46 ETH. Mirroring the previous instances, the rug pull token masqueraded under the same name as the legitimate TITANX crypto token.
Fantom Foundation Funds Vanish
In alarming events, the Fantom (FTM) Foundation finds itself entangled in a harrowing tale of fund drains and swift token swaps. PeckShield has reported two significant incidents involving the Fantom Foundation’s finances, leaving the organization with substantial losses.
The first incident occurred on October 17, 2023, when wallets associated with the Fantom Foundation were drained of approximately $7 million worth of cryptocurrencies, equivalent to around 4,500 ETH.
Additionally, on October 26, the Fantom Foundation faced another devastating event. An unidentified entity, the “Fantom Foundation Drainer,” executed a bold move by swapping a staggering 8,087,377.97 DAI for 4,560.52 ETH.
The gravity of the situation intensified when the Fantom Foundation Drainer swiftly executed another swap on October 30, converting the 4,560.52 ETH back into approximately 8.3 million DAI within a mere 30 minutes.
The Fantom Foundation is now faced with the daunting task of investigating the breaches, identifying the culprits, and fortifying its security infrastructure to prevent future incidents.
Despite recent developments, the native token of the Fantom protocol, FTM, is trading at $0.2388, reflecting a 1% increase in the past 24 hours.
Notably, the token has experienced a substantial surge across various time frames. Presently, it has maintained an upward trend, with gains of over 6% and 30% in the seven-day and fourteen-day periods, respectively.
Over the year-to-date period, the token has recorded a 5% increase. These figures indicate the token’s positive performance and growth trajectory.
Featured image from Shutterstock, chart from TradingView.com
Solana price (SOL) has recently showcased an impressive performance, setting new records as it regains its bullish momentum.
After experiencing a significant decline since July 14, SOL has emerged as one of the top-performing cryptocurrencies, trailing only behind Pepecoin (PEPE) and Chainlink (LINK) in terms of gains in the past 24 hours.
With sustained upward movement, SOL has surged by 8.9% in the past day, 39% in the past week, a remarkable 51% in the last two weeks, and 68% in just 30 days.
Solana Price Potential Unveiled
The recent surge in Solana price has caught the attention of crypto enthusiasts and analysts alike. The 8.9% increase in the past 24 hours has propelled SOL to outperform most other cryptocurrencies in the top 100 list.
On this matter, renowned crypto analyst “Titan of Crypto” has shed light on the anticipated target zones for Solana in the months ahead.
According to the Titan of Crypto’s in-depth analysis, SOL has the potential to achieve a price range between $69 and $123. These projections reflect the optimistic outlook surrounding Solana’s future performance and market prospects.
However, despite recently attaining a new yearly high for 2023 and surpassing its monthly resistance level, Solana’s price faces several obstacles that could impact the realization of these projections in the upcoming months.
It is important to note that Solana’s price has reached levels not witnessed since the collapse of the FTX crypto exchange back in November 2022. These factors contribute to the existing resistance that Solana needs to overcome for the anticipated scenario to materialize.
SOL’s Next Resistance Level Presents 9% Upside Potential
What is particularly encouraging for Solana bulls is the potential for further growth in the near term, despite the upcoming challenges that may lie ahead for the cryptocurrency’s price.
Currently, the next significant resistance level stands at $36.86. If the current bullish momentum continues, there is a possibility for another leg-up of approximately 9% once this resistance is breached.
Should Solana successfully surpass this hurdle, the subsequent obstacles for SOL are positioned at $37, $39, $43, and $46 in the months to come. However, for the token to solidify the breakout of its monthly resistance and sustain the upward trend, it is crucial to achieve a monthly close above the $32 mark.
This emphasis on a monthly close above $32 serves as a key metric to confirm the bullish momentum and support the ongoing upward trajectory of Solana. Market participants will be closely monitoring these developments to assess the token’s ability to maintain its positive momentum and overcome potential challenges in the future.
According to CoinGecko data, the current Solana price stands at $33.00. The trading volume for the past 24 hours amounts to $1,668,696,328.50. With a total supply of 420 million SOL tokens, Solana’s market capitalization is valued at $13,631,609,298.
Featured image from Shutterstock, chart from TradingView.com
The Ethereum supply on exchanges has been on a steady decline since the FTX crash happened back in 2022. This was triggered by a growing distrust for centralized exchanges and investors choosing to self-custody their tokens as a result. The constant decline has now seen the Ethereum being held on exchanges fall to the lowest point since its inception.
Available ETH On Exchanges Fall To Genesis Levels
When the Ethereum network was first launched back in 2015, the available ETH on exchanges was very low due to it being a new player. The exchange balances would steadily rise over the next few years as the digital asset gained widespread acceptance and began trading on countless exchanges.
However, there has been a shift in the tide where crypto investors are now choosing to hold their ETH in private wallets rather than leaving them on exchanges. The result of this is now there is only 8.41% of the total ETH circulating supply available on exchanges.
On-chain data tracker Santiment points out that this is the lowest that Ethereum exchange balances have been since Genesis in 2015. “Prices crossed $1,850 for the first time since August 15th, and the now 8.41% of $ETH supply on exchanges is the lowest since #genesis in 2015. Whale transactions also hit a 6-month high,” Santiment said in an X post.
The move away from exchanges coincides with a rapid increase in price which suggests that holder accumulation has played a major role in the digital asset’s recovery. And if exchange balances continue to fall, meaning less willingness to sell off ETH and lower sell pressure, the value could continue to soar.
Now that the $1,700 resistance has been cleared by Ethereum bulls, they have begun to turn their attention toward much higher price points. The next significant resistance lies at $1,850 as was demonstrated on Tuesday when the bulls were rejected from that level. So $1,850 is the first price trade foo clear in the bid to establish a stronger bull trend.
Next on the list is the $1,920 level where a major roadblock is expected to happen for the ETH price. This will be one of the last defenses of the bears to prevent a full-blown bull rally and bulls are sure to run into a lot of resistance at this level.
Last but not least is the $2,000 mark which has eluded bulls for the better part of this year. It is arguably the most significant price level for Ethereum right now that could signal an end to the bleed. So ETH bulls will need to reclaim this level from the bears and turn it into support.
March witnessed a series of bank failures that have had ramifications for institutional crypto trading, putting a damper on what was once considered a bustling market space.
According to the latest insights from the blockchain intelligence platform Chainalysis, concerning North America, the fallout from these bank closures has been far-reaching, impacting the pace and volume of large-scale crypto transactions.
A Dip In Institutional Crypto Activity
Chainalysis’s recent report highlights the drop in “institutional” cryptocurrency transaction volume – transactions valued at more than $10 million. Starting in April 2023, the volume of these transactions plunged sharply, particularly in the North American region.
Interestingly, this downturn was specific to institutional transactions, as professional and retail trading volumes reportedly “remained constant.”
Transaction volume transfer-wise from July 2022 to June 2023. | Source: Chainalysis
The report points directly to the banking crisis in March, which led to several major US bank shutdowns, including the “Silicon Valley Bank and the crypto-friendly banks Signature and Silvergate” as factors that resulted in this drop.
In addition, the failure of troubled digital currency exchanges and lending desks, such as FTX and Alameda Research, in the preceding November further exacerbated the decline, according to the Chainalysis report.
The Exodus Of Stablecoins From North America
Furthermore, in the Chainlalysis report, one of the notable aftermaths of the banking crisis has been the dwindling dominance of stablecoins in North America. Stablecoins, primarily USD-pegged tokens, accounting for roughly 90% of global activity, began to lose ground in North America from February 2023 onwards.
Within a short span from February to June, the percentage of digital currency volume in the region attributable to stablecoins declined from 70.3% to 48.8%.
North America crypto transaction volume by asset type from June 2022 to July 2023. | Source: Chainalysis
Chainalysis’s research further underscores that since the spring of 2023, there has been a noticeable shift of stablecoin inflows from US -US-licensed crypto services to their non-U.S. counterparts.
This shift denotes a broader migration pattern, with businesses and traders seeking financial shores beyond US jurisdictions. The report noted:
Since [the] spring of 2023, the majority of stablecoin inflows to the 50 biggest crypto services have shifted from US licensed-services to non-U.S. licensed services, undoing a shift in the opposite direction that occurred over the course of late 2022 and early 2023.
Stablecoin inflows in US-licensed services compared to non-US-licensed services. | Source: Chainalysis
Chainalysis further disclosed that non-U.S. licensed platforms received 54.6% of stablecoin inflows among the top 50 services as of June.
The global crypto market cap value on the 1-day chart. Source: Crypto TOTAL Market Cap on TradingView.com
Featured image from iStock, Chart from TradingView
Ethereum (ETH) has so far relatively underperformed in comparison to the flagship cryptocurrency Bitcoin. However, that could change soon enough as a crypto analyst has predicted the second-largest crypto token by market to gain some momentum soon enough.
Ethereum To Hit $1900
In a post shared on his X (formerly Twitter) platform, prominent crypto analyst Ali Martinez mentioned that Ethereum could rise to as high as $1,900. His prediction was based on data that he had pulled up from the chart which he shared in his post.
The chart (a 3-day timeframe) featured an ascending triangle pattern, which usually represents a bullish formation. According to Ali, Ethereum is “poised” to rebound off the hypotenuse of the ascending triangle. Most importantly, for Ethereum to go as high as $1,900, the analyst noted that It has to experience a “firm close” above the 18-day SMA (Simple Moving Average).
ETH getting ready to breakout | Source: X
If that happens, Ethereum could hit $1,800 and further rise to $1,900 based on Ali’s predictions. It is worth mentioning that the last time Ethereum hit $1,900 was back in July 2023. A rise to that price again will represent about an %18 increase from its current price of $1,600.
Ali also had something to say about the flagship cryptocurrency, Bitcoin. In a subsequent post, he noted that the crypto token could see a correction to $28,800; a prediction he made based on the TD Sequential from a 4-hour chart.
Bitcoin rose to as high as $30,000 on October 20, with many speculating that a Spot Bitcoin ETF approval could be on the way, something that represents a bullish momentum for Bitcoin and the crypto market in general.
Data from TradingView shows that Bitcoin’s dominance has been on the rise this year, with the token currently boasting over 52% coin dominance in the crypto market. Interestingly, it has steadily risen since the Ethereum Merge occurred.
This is significant considering that many speculated that ‘the Flippening’ could happen after the Merge, where Ethereum overtakes Bitcoin to become the most dominant crypto token. However, that hasn’t happened so far, with Ethereum’s move from proof-of-work to proof-of-work being seen as ‘disastrous’ for the crypto token.
Bitcoin and Ethereum, however, share the podium when it comes to the best-performing assets of the year. Both crypto tokens are said to have outperformed the NASDAQ, S&P500, and Gold. Bitcoin has seen an %80 increase year-to-date (YTD), while Ethereum has seen a %35 increase YTD.
Featured image from Analytics Insight, chart from Tradingview.com
Data from Lookonchain, a blockchain analytics platform, on October 20, shows that one Ethereum (ETH) whale is actively moving coins to Kraken, a crypto exchange, and appears to be selling. The unidentified whale deposited 35,176 ETH, worth over $56.5 million when writing, and withdrew $10 million in USDT hours later. USDT is the world’s most liquid stablecoin, tracking the value of the USD.
Ethereum Whale Selling On Kraken
Still, it is not immediately clear whether the whale ended up selling the whole stash and only choosing to withdraw $10 million. What’s evident is that the unknown whale has been actively accumulating Ethereum for some years before deciding to take profit.
Looking at market trends, the whale appears to be taking profit and exiting. Often, when coins are moved to centralized crypto exchanges, market participants interpret the event as net bearish. This can impact sentiment, even forcing prices lower, especially if the broader crypto market is falling.
Deposits to Kraken| Source: Lookonchain on X
According to Lookonchain, the whale accumulated 35,176 ETH on Kraken at an average price of around $415. When the address chose to liquidate, its realized profit was approximately $41.8 million. Ethereum prices have more than quadrupled the average entry price at spot rates, meaning the whale remains “in green” despite recent market gyrations.
Ethereum whale accumulating| Source: Lookonchain on X
Since prices have been primarily dicey, moving horizontally and occasionally posting sharp falls, the whale might have chosen to exit. Even so, it could not be ascertained what motivated the ETH holder to sell when sentiment is overly improving across the crypto scene.
Presently, Ethereum traders are bullish, expecting prices to increase in the sessions ahead. Notably, as of October 20, prices were relatively firm and rising. To illustrate, Ethereum is up roughly 3%, and bulls are soaking selling pressure. At the same time, the coin is up 5% from October 2023 lows.
Traders Bullish, Will ETH Clear $2,000?
Ethereum price charts show that the immediate resistance level in the medium term is at around $1,750, recorded in early October. On the flip side, support is at $1,530. A bullish breakout at the back of rising volumes pushing the coin above the resistance level may trigger more demand, propelling it toward the psychological $2,000 level.
In early October, the United States Securities and Exchange Commission (SEC) approved several Ethereum Futures Exchange-Traded Funds (ETFs), including VanEck Ethereum Strategy ETF (EFUT) and ProShares Ether Strategy ETF (EETH). Analysts interpreted this decision as a boost for ETH since it allowed institutions to have a regulated way of investing in Ethereum without necessarily having to buy and store the coins by themselves.
The total amount of Ethereum (ETH) staked on Lido Finance, one of the many liquidity staking protocols available, has risen steadily over the past few years. Surprisingly, revenue accrued by the platform (compared to staking rewards distributed) remains comparatively low.
Lido Finance Revenue Isn’t Growing As Fast As Expected
Looking at Token Terminal data shared on October 19, the blockchain analytic platform observed that while staking rewards paid, counted as “fees” by Lido Finance grew from less than $10 million in early 2021 to over $60 million in June 2023, revenue has grown at a much slower pace. To illustrate, Lido Finance’s average revenue is roughly less than $5 million during this period.
Lido Finance fees versus revenue| Source: Token Terminal
Overall, Lido Finance is a liquidity staking protocol that supports the staking of multiple proof-of-stake (PoS) coins like Ethereum (ETH) without necessarily locking them up. Users can concurrently earn staking rewards while accessing their hard-earned ETH–or any other coin supported.
The protocol issues another derivative, stETH, for every ETH staked to achieve this. This token can be freely traded on exchanges. It can even be used as collateral for users keen on taking trustless loans on supported platforms.
Ethereum recently shifted to be a proof-of-stake blockchain to be greener and conserve the environment. This transition was a boon for protocols that supported the first smart contract platform to confirm transactions and remain secure, especially after the activation of Shanghai in April 2023.
The Shanghai upgrade allowed Ethereum validators to withdraw their staked ETH for the first time, permitting them to use alternatives, of which Lido Finance, looking at total value locked (TVL), was preferred. As of October 19, Lido Finance had a TVL of $13.913 billion, most of it being assets on Ethereum.
Lido Finance TVL| Source: DeFiLlama
Ethereum Centralization Concerns: How Will This Be Addressed?
Lido Finance makes staking more accessible to everyone while concurrently enhancing liquidity. However, the revenue generated appears low versus the amount of staking rewards distributed to stakers, most of whom are from Ethereum. Part of the revenue the network generates is also distributed to LDO holders and node operators. Whether the liquidity staking protocol plans to increase the 10% fee charged to increase revenue earned remains to be seen.
Presently, there are concerns that Lido Finance’s role on Ethereum could lead to centralization. Ethereum has been accused of being “centralized,” mainly in how it is built. Critics assert that the reliance on its co-founder, Vitalik Buterin, for endorsement and guidance could slow down development in the future.
Six months into the crypto meltdown that’s wiped $2 trillion off the market, people are still talking about the chances of a rebound–a “crypto spring” after yet another “winter.” What’s surprising is that the correction hasn’t been enough to inject more realism into the discussion. What the carnage actually reveals is that most blockchain-enabled crypto businesses need to be rethought and rebuilt from top to bottom.
Hopefully, our world of speculators will one day be replaced by pragmatists, who can see the blockchain for what it is: a powerful new technology, but not the new internet.
The blockchain has the potential to help shape the future and power progress and growth–just not in the way it’s typically deployed today. What we’ve witnessed is an industry that often talks of “freedom” and “autonomy”, but just as often tries to use that language to mislead the public. We’ve come across many founders looking to make a quick buck, instead of those willing to commit to the long, multi-year effort to build real value. We’ve seen people wielding a technology that’s casting around for applications, rather than those trying to solve a real and pressing problem.
When the industry rebuilds, we will hopefully see more genuinely mission-driven blockchain entrepreneurs. In the meantime, it’s important to sift the dreams from the delusions.
The trouble began when people started to talk up the potential of crypto to replace the world’s sovereign currencies, destroy the banks, and totally remove the need for corporate governance via distributed autonomous organizations. The industry was soon flush with money reliant on the success of cryptocurrencies–with many players creating conflicts of interest and artificially increasing the value of the businesses by buying up tokens.
“Community” became one of the most used terms in crypto, but too often it’s a byword for pushing bad investments. We love real communities–but a pyramid scheme is not the same as a network effect. Too many crypto entrepreneurs have been incentivized to talk up, overinflate, and generally “pump and dump” various currencies. Rampant speculation became the biggest affliction.
The current environment is based on token issuers getting rich on day one–equivalent to a startup founder selling a chunk of their company and pocketing it before anything has been built. If you move in crypto circles, you might well have encountered those who’ve cashed out and now loiter in self-satisfied cliques at conferences.
To make it worse, regulators have been slow to act, which is in part why crypto has been so attractive. The sad result is that many people have been ruined by the crypto crash, and no one’s been there to protect them.
The good news is that regulation is coming. Companies using blockchain technology need to focus on creating long-term value with the assumption that the normal laws and rules of finance will apply–from “Know Your Customer” to “Anti-Money-Laundering.” Anything that smells off probably is.
Similarly, crypto businesses can’t sidestep the consequences for the climate of how their tokens are maintained with vast amounts of computing power. Any company that relies on some kind of blockchain can’t avoid talking about its environmental impact and building a responsible business model that takes it into account.
The Ethereum blockchain’s recent switch from a “proof-of-work” process to validate transactions to a “proof-of-stake” one–which reduces its energy consumption by 99.9%–is a step in the right direction, and shows how crypto businesses are capable of reform.
The blockchain can still have a bright future. Lots of us at Index were–and continue to be–intrigued by the technology. We see its possibilities as a medium of exchange (being able to transfer ownership between two people without a trusted third party) and a store of value. There is potential in things like open identity verified by cryptography, the secure transfer of digital assets, the possibility of a verified and transparent record of transactions, and institutional-grade solutions.
In that spirit, we have and will continue to make investments in blockchain businesses–staying away from startups that make all of their money through short-term trading, gambling, or taking advantage of investors’ credulity. Instead, we’ll back companies that are building the rails for crypto, as well as those leveraging the technology to create better products and services.
It may take a while before more businesses emerge in these areas, but they’re likely to share a few common characteristics. They will offer products and services to a broad set of businesses and consumers, not just crypto natives; they will provide a clear benefit to users, and solve a real pain point; and they will apply blockchain across every sector, rather than creating a sector of their own.
Fundamentally, we’re agnostic about the choice of technology that sits behind a business. What we care about is what someone is doing with that infrastructure. Once some of crypto’s most intriguing use cases become established, nobody will worry whether they’re blockchain-powered or not. In our view, cryptography is simply an interesting type of technology that can do certain things better–not something that’s going to fundamentally alter the mechanics of our economy and society.
Let’s hope that the present crypto crunch will have a salutary effect in clearing out the many businesses that lack the necessary vision and conviction. There is no doubt that hugely important and influential companies will be built on the back of the blockchain. They just won’t look like most of the businesses kicking around today.
In the meantime, we’ll be cheering on those truly revolutionary founders who want to grab this technology and build something amazing with it.
Danny Rimer is a partner at Index Ventures, a venture capital firm with offices and investments in the U.S., Europe, and Israel.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
The record-breaking NFT sale by Beeple in 2021 Q1 re-ignited market interest in NFTs after the initial foundation was laid out by the Cryptokitties project back in 2017. This was followed up by NFT projects like CryptoPunks and Board Ape Yacht club that soared in prices in a very short period of time. The sudden spike in market sentiment for NFTs made many investors millionaires overnight. That said, amidst all this excitement, NFT investors can easily fall victim to many tax pitfalls due to ambiguous tax guidance and lack of education on how to manage NFT taxes correctly.
Key Concepts
What are NFTs?
Non-fungible tokens (NFTs) are digital representations of assets — artwork, domain names, music, characters in games — created in limited quantities to maintain scarcity. Each NFT is unique and therefore not interchangeable with another in a similar manner to fungible digital assets such as bitcoin or ether.
For example, CryptoPunks is a collection of a thousand unique pixelated avatars with different facial features and characteristics. Since each character is unique, CryptoPunk #4835 is not interchangeable with CryptoPunk #5801.
You can buy and sell NFTs in dedicated marketplaces such as OpenSea, SuperRare and Nifty Gateway, among others. Additionally crypto exchanges like Binance, Coinbase, or FTX have announced or launched NFT platforms.
Tax Treatment of NFTs
How taxes work for NFT investors
NFT investors are individuals who buy and sell NFTs in marketplaces like OpenSea.They are subject to a similar set of tax rules (with some tweaks) as cryptocurrency investors.
How the IRS treats NFTs
Although the IRS has not issued any NFT specific tax guidance, most art-based NFTs such as CryptoPunks are likely classified as collectibles under the IRS § 408(m)(2)(A)). This tax classification is important to note because it subjects NFT gains to a slightly higher tax rate than regular cryptocurrency in some cases. Note that fractionalized NFTs will still preserve the same underlying tax classification.
When do Investors have to worry about NFT Taxes?
First, purchasing an NFT using a cryptocurrency like ether (ETH) triggers a taxable event. This is because you are disposing of a property to buy an NFT. For example, Sam spent 1 ETH to purchase a CryptoPunk valued at $5,000. Sam paid $100 to buy this ETH few years ago. Sam will have a $4,900 ($5,000 – $100) long term capital gain at the time he spends the ETH to buy the CryptoPunk. $5,000 will be his cost basis for the NFT.
Second, cashing out an NFT or trading one NFT for another also trigger capital gains tax events for investors. If Sam were to sell his CryptoPunk for 2 ETH valued at $12,000, he’d Incur a capital gain of $7,000 ($12,000 – $5,000)
Third, some NFTs also pay you royalties each time a subsequent sale occurs. In this case, royalties paid in cryptocurrencies are taxed when earned.
NFT Tax Pitfalls
You could owe NFT taxes without ever receiving cash
There are three situations where you could owe NFT taxes without ever receiving any cash in hand. These include purchasing an NFT using a cryptocurrency, trading one NFT with another and earning royalties in cryptocurrency. Unfortunately, most NFT holders are not aware of these rules. This could result in large and surprising bills come tax day, which you may not have the cash to pay.
You could incur penalties for not paying taxes on time
If you generated large amounts of profits from NFTs, you could have a quarterly tax obligation in 2021 for the first time. You may be unaware of this leading to underpayment penalties. To avoid getting penalized, you should consult with a tax professional to figure out your quarterly tax obligation or see if you qualify for a safe harbor.
At high-income levels, NFT gains could be subject to higher tax rates than you anticipated
A short-term capital gain occurs when you sell an asset after holding it for less than 12 months. If you are somebody who rode the NFT wave in 2021, most of your gains will be short-term. Short-term gains on NFTs can be subject to the maximum 37% If you are in the highest tax bracket. Also, be prepared to pay an additional 3.8% Net Investment Income tax if you exceed the applicable income thresholds for the year.
A long-term capital gain occurs when you sell an asset after holding It for more than 12 months. Generally, tax law favors long-term capital gains by subjecting them to a lower tax rate than short-term capital gains. The maximum long-term capital gains tax rate is 20% for stocks and cryptocurrencies (plus the 3.8% NII tax when applicable). Unfortunately, since NFTs are classified as collectibles, long-term NFT gains are subject to a maximum rate of 28% for high income earners.
Calculating NFT gains & losses is difficult
Currently, NFT marketplaces do not provide you with any tax documents nor any transaction history reports to figure out your NFT capital gains and losses. So, it is your responsibility to keep detailed records, figure out the correct cost basis & market values and accurately file taxes.
In the cryptocurrency world, there is tax software which helps you automatically reconcile capital gains & losses by connecting to your wallets and exchanges. However, when it comes to NFTs, the software support is at its infancy causing you to have to manually calculate taxes in some cases.
NFT Valuation concerns
NFTs are not like cryptocurrencies where you can actively see fair market values on websites like CoinGecko or Coinmarketcap. Therefore, if you trade one NFT with another, you will have to appraise the value of the receiving NFT to compute the accurate taxable gain or loss. Appraisal could become a big issue especially when the transaction amount is significant. Again, it is your responsibility to identify these events and seek professional help to accurately figure out your NFT taxes.
Next Steps
· Reconcile your NFT capital gains and losses.
· Consult with a qualified tax adviser and calculate your projected tax obligation for 2021.
· Determine If you are required to pay taxes quarterly or meet the safe harbor for 2021.
· If needed, liquidate some NFT’s and/or other cryptocurrencies into cash to cover the upcoming tax bill
Blockchain lending & borrowing platform chosen as founding member of SDG Impact Fund
Press Release –
updated: Sep 21, 2018
NEW YORK, September 21, 2018 (Newswire.com)
– Announced today at the United Nations, Fifth Element is launching its SDG Impact Fund and will be the first to accept and deploy traditional assets and all forms of crypto, token and digital assets for the mission of meeting the UN Sustainable Development Goals.
Celsius Network is a founding member of the fund and will be its preferred digital wallet. The fund plans to raise several hundred million dollars and deploy them in both fiat and digital format using public blockchains.
We see a great opportunity to use this technology to deliver the value collected by different UN organizations in a more precise and effective way to the people and organizations that need it most.
Scott Stornetta, Adviser, Celsius Network
At the SDG Frontier Finance forum event today, held in conjunction with the International Day of Peace, Bryan Doreian, Chief Development Magus, Fifth Element Fund, announced the selection and partnership. The event also included the first few donors to contribute to the fund. Celsius Network was named as a founding member.
Scott Stornetta, adviser to Celsius and one of the original inventors of blockchain technology, commented, “We see a great opportunity to use this technology to deliver the value collected by different UN organizations in a more precise and effective way to the people and organizations that need it most.”
The Fifth Element Fund plans to use the public blockchain to implement its global programs and use the technology to both monitor and implement its mission in line with the UN Sustainable Development Goals.
Celsius Network aims to bring power back to the people by providing banking services typically reserved for the top 1 percent. “By offering earned interest rates up to 7.1 percent, we allow individuals to make the same passive income Wall Street has been making for years,” says Celsius CEO, Alex Mashinsky. “Joining forces with Fifth Element will ensure our services reach those most deserving.”
If you would like more information please call Kristen Ryan at 603-401-5897 or email kristen@celsius.network
