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Tips to claim tax losses with the US Internal Revenue Service

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Tips to claim tax losses with the US Internal Revenue Service

Crypto volatility is nerve-wracking, and it may not be over yet. The turmoil may make crypto investors and crypto-related businesses less enthusiastic than when prices seemed ever to be climbing. With the market falling off a cliff, there will be big losses to claim on your taxes, right? Not necessarily. As your United States dollars shake out in the digital world, it is worth asking whether there is any lemonade you can make by claiming losses on your taxes.

First, ask what happened from a tax viewpoint. If you’ve been trading and triggering big taxable gains, but then the floor drops out, first consider whether you can pay your taxes for the gains you have already triggered this year. Taxes are annual and generally based on a calendar year unless you have properly elected otherwise. Start with the proposition that each time you sell or exchange a cryptocurrency for cash, another cryptocurrency, or for goods or services, the transaction is considered a taxable event.

That is a result of the U.S. Internal Revenue Service’s shot heard ‘round the world in Notice 2014-21 when the IRS announced that crypto is property for tax purposes. Not currency, not securities, but property, so most any transaction means the IRS wants you to report gain or loss.

Related: Things to know (and fear) about new IRS crypto tax reporting

Before 2018, many crypto investors claimed that crypto-to-crypto exchanges were tax-free. But that argument was based on section 1031 of the tax code. It was a good argument, depending on the facts and the reporting. But that argument went away starting in 2018. Section 1031 of the tax code now says it applies to swaps of real estate only.

The IRS is auditing some pre-2018 crypto taxpayers and, so far, doesn’t appear to like the 1031 argument, even before 2018. The IRS even released one piece of guidance saying that tax-free crypto exchanges don’t work. We may need a court case to resolve it if the IRS pushes it that far. After all, it only applies to 2017 and prior years, so it’s of diminishing importance.

But regardless of whether you use crypto to pay someone, swap crypto, or outright sell it, do you have gains or losses? For most people, gains or losses would be subject to short-term or long-term capital gains/losses based on the basis (what you paid for the crypto), holding period, and the price at which the cryptocurrency was sold or exchanged. Yet some people may have ordinary gains or losses, and that topic is worth revisiting. Are you trading in crypto as a business?

Related: The major tax myths about cryptocurrency debunked

Most investors want long-term capital gains rates on gains if they buy and hold for more than a year. However, ordinary income treatment could be helpful for some, at least for losses. Securities traders can make a section 475 mark-to-market election under the tax code, but does that work for crypto? It’s not clear. To qualify, one must argue that the crypto constitutes securities or commodities.

The U.S. Securities and Exchange Commission has argued that some cryptocurrencies are securities, and there may be arguments for commodity characterization, too. It’s at least worth considering in some cases. However, in addition to establishing a position that a digital currency is a security or commodity, you would need to qualify as a trader in order to make a mark-to-market election. Whether one’s activities constitute “trading” as opposed to “investing” is a key issue in determining whether one is eligible to make a mark-to-market election.

The IRS lists details about who is a trader, usually characterized by high volume and short-term holding, although sometimes investing and trading might look rather similar.

If crypto turns out to be eligible for mark-to-market and if you qualify and elect it, you could mark to market your securities or commodities on the last business day of the year. Any gain or loss would be ordinary income, and gains, too. A benefit would be that the cumbersome process of tracking the date and time that each crypto was acquired and identifying the crypto you sold would not be required.

For most people, this election, if available, likely won’t make any sense, but as with so much else in the crypto tax world, much is uncertain. In the past, some drops in crypto value have been called a “flash crash,” an event in electronic securities markets where the withdrawal of stock orders rapidly amplifies price declines, and then quickly recovers. In the case of stock, the SEC voted on June 10, 2010, to enact rules to automatically stop trading on any stock in the S&P 500 whose price changes by more than 10% in any five-minute period.

A stop-loss order directs a broker to sell at the best price available if the stock reaches a specified price. Some people use the same idea with crypto. Some even want to buy the crypto back after a sale, and with crypto, you can do that. In contrast, with stock, there are wash sale rules, which restrict selling (to trigger losses) and buying back stock within 30 days. There are no wash sale rules for crypto, so you can sell your crypto and buy it right back without a 30-day waiting period.

This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Robert W. Wood is a tax lawyer representing clients worldwide from the office of Wood LLP in San Francisco, where he is a managing partner. He is the author of numerous tax books and frequently writes about taxes for Forbes, Tax Notes and other publications.

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BTC price tops 10-day highs as Bitcoin whale demand sees ‘huge spike’

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BTC price tops 10-day highs as Bitcoin whale demand sees ‘huge spike’

Dip-buying appears to be in full swing among whales, new data shows, but analysts remain wary on the outlook for the short term.

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BTC price tops 10-day highs as Bitcoin whale demand sees 'huge spike'

Bitcoin (BTC) made the most of weekend volatility on June 26 as a squeeze saw BTC/USD reach its highest in over a week.

BTC/USD 1-hour candle chart (Bitstamp). Source: TradingView

“Unusual whale activity” flagged

Data from Cointelegraph Markets Pro and TradingView followed the largest cryptocurrency as it hit $21,868 on Bitstamp.

Just hours from the weekly close, a reversal then set in under $21,500, Bitcoin still in line to seal its first “green” weekly candle since May.

The event followed warnings that volatile conditions both up and down could return during low-liquidity weekend trading. On-chain data nonetheless fixed what appeared to be buying by Bitcoin’s largest-volume investor cohort prior to the uptick.

“Unusual whale activity detected in Bitcoin,” popular analytics resource Game of Trades observed.

“The supply held by entities with balance 1k-10k BTC just saw a huge spike in demand. Let’s watch if the trend confirms.”

An accompanying chart from on-chain analytics firm Glassnode showed shifting up markedly from around the time BTC/USD hit lows of $17,600 this month.

BTC supply held by entities with 1,000-10,000 BTC annotated chart. Source: Games of Trades/ Twitter

As Cointelegraph reported, whales had eagerly purchased BTC below $20,000, forming new support clusters in the process.

CME futures gap looms large

For others, however, conservative views on price action remained the norm.

Related: Bitcoin gives ‘encouraging signs’ — Watch these BTC price levels next

Cointelegraph contributor Michaël van de Poppe eyed the need to crack $21,600 definitively in order to secure the chances of further upside. Additionally, last week’s closing price of $21,100 on CME Group’s Bitcoin futures could provide a short-term target.

“Standard weekend fake-outs happening and probably ending at CME close at $21.1K for Bitcoin,” he forecast on the day.

“No clear breakout above $21.6K at this point, yet.”

CME Bitcoin futures 1-hour candle chart. Source: TradingView

The monthly close was still on course to cement Bitcoin’s worst June on record with monthly losses of almost 33%.

Along with May 2021, this would also be the worst-performing month since before the 2018 bear market bottom, data from on-chain monitoring resource Coinglass confirms.

Bitcoin monthly returns chart (screenshot). Source: Coinglass

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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What are Bitcoin covenants, and how do they work?

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What are Bitcoin covenants, and how do they work?
You must confirm the subscription in your inbox.”,”subscribe_email_required”:”Email required”,”subscribe_email_invalid”:”A valid email address must be provided. “,”shares”:”Total shares”,”views”:”Total views”,”sponsoredBadge”:”stretch_banners.sponsored.badge”}” :post=”{“id”:88760,”seo_title”:”What are Bitcoin covenants, and how do they work?”,”seo_description”:” Bitcoin improvements can be achieved by implementing covenants. This article explains covenants, how they work and the debate around them….”,”keywords”:” Bitcoin “,”canonical”:”https://cointelegraph.com/explained/what-are-bitcoin-covenants-and-how-do-they-work”,”thumb”:”https://images.cointelegraph.com/images/1024_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS9zdG9yYWdlL3VwbG9hZHMvdmlldy82MDVkNzQyNTQwZThmOWE2ZTUzNTcxODBjNDU1NWMyZS5qcGc=.jpg”,”img”:”https://images.cointelegraph.com/images/2048_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS9zdG9yYWdlL3VwbG9hZHMvdmlldy82MDVkNzQyNTQwZThmOWE2ZTUzNTcxODBjNDU1NWMyZS5qcGc=.jpg”,”youtube”:””,”og_title”:”What are Bitcoin covenants, and how do they work?”,”og_description”:” Bitcoin improvements can be achieved by implementing covenants. This article explains covenants, how they work and the debate around them. “,”twitter_title”:”What are Bitcoin covenants, and how do they work?”,”twitter_description”:” Bitcoin improvements can be achieved by implementing covenants. This article explains covenants, how they work and the debate around them. “,”published”:”2022-06-26T15:00:00+01:00″,”noindex”:0,”modified”:”2022-06-26T15:44:07+01:00″,”title”:”What are Bitcoin covenants, and how do they work?”,”leadtext”:” Bitcoin improvements can be achieved by implementing covenants. This article explains covenants, how they work and the debate around them. “,”amp”:”https://cointelegraph.com/explained/what-are-bitcoin-covenants-and-how-do-they-work/amp”,”alternates”:[],”alternatesLinks”:[],”url”:”what-are-bitcoin-covenants-and-how-do-they-work”,”url_full”:”/explained/what-are-bitcoin-covenants-and-how-do-they-work”,”category”:{“id”:65,”url”:”explained”,”priority”:0,”created”:null,”modified”:null,”parent_id”:0,”is_hidden”:0,”created_at”:”-0001-11-30 00:00:00″,”updated_at”:”2022-02-22 18:25:15″,”deleted_at”:null,”admin_weight”:30,”enabled”:1,”is_blog”:0,”relevant”:0,”category_id”:65,”language_id”:1,”title”:”Explained”,”alt”:””,”keywords”:””,”seo_title”:”Explained: articles for beginners about cryptocurrency and blockchain.”,”description”:”

What is Bitcoin? How does blockchain work? How to mine cryptocurrency? We are glad to help you answer these questions with our quick guides in Explained section.

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Emi has been an educational content writer in the crypto space for several years and aims at accurately delivering complex concepts.”,”facebook”:””,”email”:””,”linkedin”:””,”created_at”:”2022-04-13 13:40:07″,”updated_at”:”2022-04-23 16:17:03″,”deleted_at”:null,”avatar”:”https://cointelegraph.com/assets/img/icons/author_female.png”,”hash”:”aHR0cHM6Ly9jb2ludGVsZWdyYXBoLmNvbS9hdXRob3JzL2VtaS1sYWNhcHJh”,”relativeUrl”:”https://cointelegraph.com/authors/emi-lacapra”,”user_id”:1534,”language_id”:1,”name”:”Emi Lacapra”,”desc”:”Emilia Lacapra has been learning about cryptocurrency and blockchain since 2017. She first started as a small investor and soon became passionate about the industry, the technological innovation and the improvement that it could bring to the world. She believes Bitcoin is the natural currency of the internet. Emi has been an educational content writer in the crypto space for several years and aims at accurately delivering complex concepts.”,”seo_title”:””,”seo_description”:””,”enabled”:1,”show_in_authors”:0,”show_in_experts”:0},”category_id”:65,”audio”:”https://s3.cointelegraph.com/audio/88760.69aa3cdb-bee3-40df-a9cc-f33ce939ce1c.mp3″,”tags”:[{“name”:”Bitcoin”,”uri”:”/tags/bitcoin”,”super”:1,”page_title”:”Bitcoin News”}],”tag_title”:”Bitcoin”,”date”:”4 HOURS AGO”,”badge”:{“title”:”Explained”,”label”:”default”},”qty”:79,”stats_pixel”:”“,”stats_pixel_url”:”https://zoa.cointelegraph.com/pixel?postId=88760&regionId=1″,”shares”:6,”infographic”:false,”sponsored”:false,”explained”:true,”press_release”:false,”show_referral”:false,”social_description”:” Covenants have the potential to improve Bitcoin, but remain controversial due to a risk to the cryptocurrency’s fungibility and censorship-resistant property. 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A covenant is used in private property law as a contract to restrict an object’s use, for example, the interdiction to extend a building or change a facade’s color.

nn

Since Bitcoin is private property, the term covenant seems perfectly fitted to indicate restrictions on its transactions. You have ownership of the property but can be limited in what you can do with it.

nn

Specifically, Bitcoin covenant proposals restrict how a coin can be spent after you bought it and where coins can be transferred. These restrictions can be compared to those that banks might place on specific merchants suspected of engaging in illicit activities. 

nn

Covenants can be useful to upgrade Bitcoin; however, since they are complex to implement and trigger controversy over the cryptocurrency’s fungibility and censorship-resistant property, they have not been seriously considered for inclusion in Bitcoin for a long time. 

nnnnn”,”created_at”:”2022-06-26 14:45:15″,”updated_at”:”2022-06-26 15:44:07″,”sort”:1,”translations”:{“id”:3539,”explained_post_id”:3546,”title_en”:”What are covenants?”,”content_en”:”

A covenant is used in private property law as a contract to restrict an object’s use, for example, the interdiction to extend a building or change a facade’s color.

nn

Since Bitcoin is private property, the term covenant seems perfectly fitted to indicate restrictions on its transactions. You have ownership of the property but can be limited in what you can do with it.

nn

Specifically, Bitcoin covenant proposals restrict how a coin can be spent after you bought it and where coins can be transferred. These restrictions can be compared to those that banks might place on specific merchants suspected of engaging in illicit activities. 

nn

Covenants can be useful to upgrade Bitcoin; however, since they are complex to implement and trigger controversy over the cryptocurrency’s fungibility and censorship-resistant property, they have not been seriously considered for inclusion in Bitcoin for a long time. 

nnnnn”,”title_es”:””,”content_es”:”nnn”,”title_cn”:””,”content_cn”:”nnn”,”title_de”:””,”content_de”:”nnn”,”title_fr”:””,”content_fr”:”nnn”,”title_it”:””,”content_it”:”nnn”,”title_ar”:””,”content_ar”:”nnn”,”title_br”:””,”content_br”:”nnn”,”title_jp”:””,”content_jp”:”nnn”,”created_at”:”2022-06-26 14:45:15″,”updated_at”:”2022-06-26 15:44:07″,”title_kr”:””,”content_kr”:”nnn”,”title_tr”:””,”content_tr”:”nnn”}},{“id”:3547,”post_id”:88760,”title”:”Can Bitcoin be improved?”,”content”:”

Bitcoin can undoubtedly be improved, and BIPs, including covenants, represent proposed changes to Bitcoin’s consensus. 

nn

Covenants are included in Bitcoin Improvement Proposals (BIPs), the upgrade and improvement process Bitcoin undergoes to modify and advance issues like scalability, security and usability.

nn

Covenants allow a Bitcoin script language to prevent an authorized spender from spending on specific other scripts. They describe how to improve Bitcoin in smart contracts, information included in a code that executes when certain conditions are met. 

nn

These Bitcoin contracts could prevent users’ funds from being stolen in case of hacking and can also help scale the network. There are many proposed applications for covenants, from scaling Bitcoin transaction capacity to congestion control, trust-minimized loans and more. These use cases are described in the controversial BIP119, presented by developer Jeremy Rubin as a soft fork, and discussed by the community. 

nn

This Bitcoin Improvement Proposal introduces a change to Bitcoin’s code, which seeks to use a new operation code (opcode). The opcode is OP_CHECKTEMPLATEVERIFY (CTV-style covenant) and enables a limited set of precious use cases without incurring significant risks. 

nn

CTV can potentially help scale Bitcoin through the implementation of Congestion Controlled Transactions. When transaction traffic is very high, fees increase exponentially. Using this CTV, large payment processors can include all their payments in a single transaction for confirmation purposes, saving block space and resulting in faster and cheaper execution.

nnnnn”,”created_at”:”2022-06-26 14:46:03″,”updated_at”:”2022-06-26 15:44:07″,”sort”:2,”translations”:{“id”:3540,”explained_post_id”:3547,”title_en”:”Can Bitcoin be improved?”,”content_en”:”

Bitcoin can undoubtedly be improved, and BIPs, including covenants, represent proposed changes to Bitcoin’s consensus. 

nn

Covenants are included in Bitcoin Improvement Proposals (BIPs), the upgrade and improvement process Bitcoin undergoes to modify and advance issues like scalability, security and usability.

nn

Covenants allow a Bitcoin script language to prevent an authorized spender from spending on specific other scripts. They describe how to improve Bitcoin in smart contracts, information included in a code that executes when certain conditions are met. 

nn

These Bitcoin contracts could prevent users’ funds from being stolen in case of hacking and can also help scale the network. There are many proposed applications for covenants, from scaling Bitcoin transaction capacity to congestion control, trust-minimized loans and more. These use cases are described in the controversial BIP119, presented by developer Jeremy Rubin as a soft fork, and discussed by the community. 

nn

This Bitcoin Improvement Proposal introduces a change to Bitcoin’s code, which seeks to use a new operation code (opcode). The opcode is OP_CHECKTEMPLATEVERIFY (CTV-style covenant) and enables a limited set of precious use cases without incurring significant risks. 

nn

CTV can potentially help scale Bitcoin through the implementation of Congestion Controlled Transactions. When transaction traffic is very high, fees increase exponentially. Using this CTV, large payment processors can include all their payments in a single transaction for confirmation purposes, saving block space and resulting in faster and cheaper execution.

nnnnn”,”title_es”:””,”content_es”:”nnn”,”title_cn”:””,”content_cn”:”nnn”,”title_de”:””,”content_de”:”nnn”,”title_fr”:””,”content_fr”:”nnn”,”title_it”:””,”content_it”:”nnn”,”title_ar”:””,”content_ar”:”nnn”,”title_br”:””,”content_br”:”nnn”,”title_jp”:””,”content_jp”:”nnn”,”created_at”:”2022-06-26 14:46:03″,”updated_at”:”2022-06-26 15:44:07″,”title_kr”:””,”content_kr”:”nnn”,”title_tr”:””,”content_tr”:”nnn”}},{“id”:3548,”post_id”:88760,”title”:”How do Bitcoin covenants work?”,”content”:”

Covenants can be defined as linguistic primitives (the smallest and simplest “unit of processing” available to a programmer) that extend the Bitcoin script language allowing transactions to restrain the scripts of the redeeming ones. 

nn

In a typical Bitcoin transaction, your Bitcoin is protected with a locking script, whose conditions should be met if you want to spend the coins. Examples of locking conditions can be the denial of expenditure without a signature proving you have the private key that matches the public key; or timelocks, which are similar to covenants and indicate that coins can’t be spent until after a certain number of blocks. 

nn

So whereas in a “normal” Bitcoin script, we only require specific conditions to be met to unlock a particular requirement (sign a transaction with a private key, for example), in a covenant, we go a step further by restricting what you can do with that coin, or where a coin can be spent. 

nn

A Bitcoin covenant is often defined as “a mechanism to enforce conditions on how the control of coins will be transferred in the future” and includes a set of conditions on an unspent transaction[TX] output (UTXO), which defines how the transaction’s relevant coins can be spent.

nn

For example, one wallet can place a covenant on the Bitcoin it holds whitelisting a few related addresses. When this wallet broadcasts a Bitcoin transaction to another wallet, in turn, this wallet can only send the same Bitcoin to addresses included on that whitelist. 

nnnnn”,”created_at”:”2022-06-26 14:46:46″,”updated_at”:”2022-06-26 15:44:07″,”sort”:3,”translations”:{“id”:3541,”explained_post_id”:3548,”title_en”:”How do Bitcoin covenants work?”,”content_en”:”

Covenants can be defined as linguistic primitives (the smallest and simplest “unit of processing” available to a programmer) that extend the Bitcoin script language allowing transactions to restrain the scripts of the redeeming ones. 

nn

In a typical Bitcoin transaction, your Bitcoin is protected with a locking script, whose conditions should be met if you want to spend the coins. Examples of locking conditions can be the denial of expenditure without a signature proving you have the private key that matches the public key; or timelocks, which are similar to covenants and indicate that coins can’t be spent until after a certain number of blocks. 

nn

So whereas in a “normal” Bitcoin script, we only require specific conditions to be met to unlock a particular requirement (sign a transaction with a private key, for example), in a covenant, we go a step further by restricting what you can do with that coin, or where a coin can be spent. 

nn

A Bitcoin covenant is often defined as “a mechanism to enforce conditions on how the control of coins will be transferred in the future” and includes a set of conditions on an unspent transaction[TX] output (UTXO), which defines how the transaction’s relevant coins can be spent.

nn

For example, one wallet can place a covenant on the Bitcoin it holds whitelisting a few related addresses. When this wallet broadcasts a Bitcoin transaction to another wallet, in turn, this wallet can only send the same Bitcoin to addresses included on that whitelist. 

nnnnn”,”title_es”:””,”content_es”:”nnn”,”title_cn”:””,”content_cn”:”nnn”,”title_de”:””,”content_de”:”nnn”,”title_fr”:””,”content_fr”:”nnn”,”title_it”:””,”content_it”:”nnn”,”title_ar”:””,”content_ar”:”nnn”,”title_br”:””,”content_br”:”nnn”,”title_jp”:””,”content_jp”:”nnn”,”created_at”:”2022-06-26 14:46:46″,”updated_at”:”2022-06-26 15:44:07″,”title_kr”:””,”content_kr”:”nnn”,”title_tr”:””,”content_tr”:”nnn”}},{“id”:3549,”post_id”:88760,”title”:”Advantages of Bitcoin covenants”,”content”:”

Improving Bitcoin security is one of the most significant advances constantly sought by developers, and covenants might offer a great helping hand in enhancing it.

nn

Besides improved scalability, covenants are helpful for security, especially against some form of the $5 wrench attack. Taking steps to protect your Bitcoin property so that it becomes harder for people to steal is an excellent use case. 

nn

Another good security approach provided by covenants would be to restrict your UTXO to be sent to a multi-sig address after a year, for example. Covenants can also address the difficulty of secure key management, and implementing secure vaults can help with one of the biggest problems of cryptocurrency security. Vaults enhance end-user security by disincentivizing the theft of coins. 

nn

The user employs a mechanism that prevents an attacker from gaining full control over funds despite stealing the private keys used to secure them. This mechanism includes the use of pre-signed transactions with key deletion to enforce a time-lock on funds. 

nn

Covenants can also implement a restrictive mechanism to prevent double-spending attacks in Bitcoin-NG, a Byzantine fault-tolerant blockchain protocol that has been recently proposed to improve Bitcoin’s throughput, latency and overall scalability. 

nn

This mechanism is translated into so-called poison transactions that can be implemented progressively as an overlay on top of the Bitcoin blockchain.

nnnnn”,”created_at”:”2022-06-26 14:47:30″,”updated_at”:”2022-06-26 15:44:07″,”sort”:4,”translations”:{“id”:3542,”explained_post_id”:3549,”title_en”:”Advantages of Bitcoin covenants”,”content_en”:”

Improving Bitcoin security is one of the most significant advances constantly sought by developers, and covenants might offer a great helping hand in enhancing it.

nn

Besides improved scalability, covenants are helpful for security, especially against some form of the $5 wrench attack. Taking steps to protect your Bitcoin property so that it becomes harder for people to steal is an excellent use case. 

nn

Another good security approach provided by covenants would be to restrict your UTXO to be sent to a multi-sig address after a year, for example. Covenants can also address the difficulty of secure key management, and implementing secure vaults can help with one of the biggest problems of cryptocurrency security. Vaults enhance end-user security by disincentivizing the theft of coins. 

nn

The user employs a mechanism that prevents an attacker from gaining full control over funds despite stealing the private keys used to secure them. This mechanism includes the use of pre-signed transactions with key deletion to enforce a time-lock on funds. 

nn

Covenants can also implement a restrictive mechanism to prevent double-spending attacks in Bitcoin-NG, a Byzantine fault-tolerant blockchain protocol that has been recently proposed to improve Bitcoin’s throughput, latency and overall scalability. 

nn

This mechanism is translated into so-called poison transactions that can be implemented progressively as an overlay on top of the Bitcoin blockchain.

nnnnn”,”title_es”:””,”content_es”:”nnn”,”title_cn”:””,”content_cn”:”nnn”,”title_de”:””,”content_de”:”nnn”,”title_fr”:””,”content_fr”:”nnn”,”title_it”:””,”content_it”:”nnn”,”title_ar”:””,”content_ar”:”nnn”,”title_br”:””,”content_br”:”nnn”,”title_jp”:””,”content_jp”:”nnn”,”created_at”:”2022-06-26 14:47:30″,”updated_at”:”2022-06-26 15:44:07″,”title_kr”:””,”content_kr”:”nnn”,”title_tr”:””,”content_tr”:”nnn”}},{“id”:3550,”post_id”:88760,”title”:”Drawbacks of Bitcoin covenants”,”content”:”

Various prominent Bitcoin experts, including Adam Back, Jimmy Song and Andreas Antonopoulos, have raised some concerns over the implementation of restrictive covenants, in particular with the BIP119.

nn

In particular, Antonopoulos has voiced concerns over “recursive covenants” that the new update could convey, thereby deteriorating the network. A recursive covenant occurs when a programmer restricts a transaction, but he does it in a way that restricts another transaction after that, starting a domino effect resulting in future limitless recursive covenants.

nn

Blacklisting and risks of censorship and confiscation

nn

While locking up where a Bitcoin can be spent is advantageous to ensure more security, it also provides grounds for censorship, and control by governments, which would hinder the very existence of Bitcoin. Authorities could potentially force exchanges to withdraw only to covenants with some control over the coin.

nn

While this same risk already exists, since governments can ask exchanges to send only to addresses with a taproot spend path or multi-sig controlled by them, could the implementation of covenants facilitate malicious purposes where it would make it easier for governments to enforce a sort of on-chain KYC? 

nn

Fungibility threats

nn

Covenants might interfere with Bitcoin’s fungibility — the ability of each Bitcoin to be identical in function and quality.

nn

While useful for security and scalability, covenants would change the properties of specific Bitcoin units, essentially creating different types of digital currency, distinct according to what could be spent or where it could be sent. 

nn

As a result, those who oppose the change argued that limiting how you can spend your Bitcoin would ultimately limit Bitcoin’s use as a digital currency, with inevitable consequences in its value.

nn

There are strong opinions on covenants’ pros and cons; however, debates are healthy and necessary to improve a decentralized and leaderless network. Ultimately, the final decision will be down to the users and node operators who will download the software that better reflects their viewpoint.

nnn”,”created_at”:”2022-06-26 14:48:41″,”updated_at”:”2022-06-26 15:44:07″,”sort”:5,”translations”:{“id”:3543,”explained_post_id”:3550,”title_en”:”Drawbacks of Bitcoin covenants”,”content_en”:”

Various prominent Bitcoin experts, including Adam Back, Jimmy Song and Andreas Antonopoulos, have raised some concerns over the implementation of restrictive covenants, in particular with the BIP119.

nn

In particular, Antonopoulos has voiced concerns over “recursive covenants” that the new update could convey, thereby deteriorating the network. A recursive covenant occurs when a programmer restricts a transaction, but he does it in a way that restricts another transaction after that, starting a domino effect resulting in future limitless recursive covenants.

nn

Blacklisting and risks of censorship and confiscation

nn

While locking up where a Bitcoin can be spent is advantageous to ensure more security, it also provides grounds for censorship, and control by governments, which would hinder the very existence of Bitcoin. Authorities could potentially force exchanges to withdraw only to covenants with some control over the coin.

nn

While this same risk already exists, since governments can ask exchanges to send only to addresses with a taproot spend path or multi-sig controlled by them, could the implementation of covenants facilitate malicious purposes where it would make it easier for governments to enforce a sort of on-chain KYC? 

nn

Fungibility threats

nn

Covenants might interfere with Bitcoin’s fungibility — the ability of each Bitcoin to be identical in function and quality.

nn

While useful for security and scalability, covenants would change the properties of specific Bitcoin units, essentially creating different types of digital currency, distinct according to what could be spent or where it could be sent. 

nn

As a result, those who oppose the change argued that limiting how you can spend your Bitcoin would ultimately limit Bitcoin’s use as a digital currency, with inevitable consequences in its value.

nn

There are strong opinions on covenants’ pros and cons; however, debates are healthy and necessary to improve a decentralized and leaderless network. Ultimately, the final decision will be down to the users and node operators who will download the software that better reflects their viewpoint.

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A covenant is used in private property law as a contract to restrict an object’s use, for example, the interdiction to extend a building or change a facade’s color.

Since Bitcoin is private property, the term covenant seems perfectly fitted to indicate restrictions on its transactions. You have ownership of the property but can be limited in what you can do with it.

Specifically, Bitcoin covenant proposals restrict how a coin can be spent after you bought it and where coins can be transferred. These restrictions can be compared to those that banks might place on specific merchants suspected of engaging in illicit activities. 

Covenants can be useful to upgrade Bitcoin; however, since they are complex to implement and trigger controversy over the cryptocurrency’s fungibility and censorship-resistant property, they have not been seriously considered for inclusion in Bitcoin for a long time. 

Bitcoin can undoubtedly be improved, and BIPs, including covenants, represent proposed changes to Bitcoin’s consensus. 

Covenants are included in Bitcoin Improvement Proposals (BIPs), the upgrade and improvement process Bitcoin undergoes to modify and advance issues like scalability, security and usability.

Covenants allow a Bitcoin script language to prevent an authorized spender from spending on specific other scripts. They describe how to improve Bitcoin in smart contracts, information included in a code that executes when certain conditions are met. 

These Bitcoin contracts could prevent users’ funds from being stolen in case of hacking and can also help scale the network. There are many proposed applications for covenants, from scaling Bitcoin transaction capacity to congestion control, trust-minimized loans and more. These use cases are described in the controversial BIP119, presented by developer Jeremy Rubin as a soft fork, and discussed by the community. 

This Bitcoin Improvement Proposal introduces a change to Bitcoin’s code, which seeks to use a new operation code (opcode). The opcode is OP_CHECKTEMPLATEVERIFY (CTV-style covenant) and enables a limited set of precious use cases without incurring significant risks. 

CTV can potentially help scale Bitcoin through the implementation of Congestion Controlled Transactions. When transaction traffic is very high, fees increase exponentially. Using this CTV, large payment processors can include all their payments in a single transaction for confirmation purposes, saving block space and resulting in faster and cheaper execution.

Covenants can be defined as linguistic primitives (the smallest and simplest “unit of processing” available to a programmer) that extend the Bitcoin script language allowing transactions to restrain the scripts of the redeeming ones. 

In a typical Bitcoin transaction, your Bitcoin is protected with a locking script, whose conditions should be met if you want to spend the coins. Examples of locking conditions can be the denial of expenditure without a signature proving you have the private key that matches the public key; or timelocks, which are similar to covenants and indicate that coins can’t be spent until after a certain number of blocks. 

So whereas in a “normal” Bitcoin script, we only require specific conditions to be met to unlock a particular requirement (sign a transaction with a private key, for example), in a covenant, we go a step further by restricting what you can do with that coin, or where a coin can be spent. 

A Bitcoin covenant is often defined as “a mechanism to enforce conditions on how the control of coins will be transferred in the future” and includes a set of conditions on an unspent transaction[TX] output (UTXO), which defines how the transaction’s relevant coins can be spent.

For example, one wallet can place a covenant on the Bitcoin it holds whitelisting a few related addresses. When this wallet broadcasts a Bitcoin transaction to another wallet, in turn, this wallet can only send the same Bitcoin to addresses included on that whitelist. 

Improving Bitcoin security is one of the most significant advances constantly sought by developers, and covenants might offer a great helping hand in enhancing it.

Besides improved scalability, covenants are helpful for security, especially against some form of the $5 wrench attack. Taking steps to protect your Bitcoin property so that it becomes harder for people to steal is an excellent use case. 

Another good security approach provided by covenants would be to restrict your UTXO to be sent to a multi-sig address after a year, for example. Covenants can also address the difficulty of secure key management, and implementing secure vaults can help with one of the biggest problems of cryptocurrency security. Vaults enhance end-user security by disincentivizing the theft of coins. 

The user employs a mechanism that prevents an attacker from gaining full control over funds despite stealing the private keys used to secure them. This mechanism includes the use of pre-signed transactions with key deletion to enforce a time-lock on funds. 

Covenants can also implement a restrictive mechanism to prevent double-spending attacks in Bitcoin-NG, a Byzantine fault-tolerant blockchain protocol that has been recently proposed to improve Bitcoin’s throughput, latency and overall scalability. 

This mechanism is translated into so-called poison transactions that can be implemented progressively as an overlay on top of the Bitcoin blockchain.

Various prominent Bitcoin experts, including Adam Back, Jimmy Song and Andreas Antonopoulos, have raised some concerns over the implementation of restrictive covenants, in particular with the BIP119.

In particular, Antonopoulos has voiced concerns over “recursive covenants” that the new update could convey, thereby deteriorating the network. A recursive covenant occurs when a programmer restricts a transaction, but he does it in a way that restricts another transaction after that, starting a domino effect resulting in future limitless recursive covenants.

Blacklisting and risks of censorship and confiscation

While locking up where a Bitcoin can be spent is advantageous to ensure more security, it also provides grounds for censorship, and control by governments, which would hinder the very existence of Bitcoin. Authorities could potentially force exchanges to withdraw only to covenants with some control over the coin.

While this same risk already exists, since governments can ask exchanges to send only to addresses with a taproot spend path or multi-sig controlled by them, could the implementation of covenants facilitate malicious purposes where it would make it easier for governments to enforce a sort of on-chain KYC? 

Fungibility threats

Covenants might interfere with Bitcoin’s fungibility — the ability of each Bitcoin to be identical in function and quality.

While useful for security and scalability, covenants would change the properties of specific Bitcoin units, essentially creating different types of digital currency, distinct according to what could be spent or where it could be sent. 

As a result, those who oppose the change argued that limiting how you can spend your Bitcoin would ultimately limit Bitcoin’s use as a digital currency, with inevitable consequences in its value.

There are strong opinions on covenants’ pros and cons; however, debates are healthy and necessary to improve a decentralized and leaderless network. Ultimately, the final decision will be down to the users and node operators who will download the software that better reflects their viewpoint.

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How low can Ethereum price drop versus Bitcoin amid the DeFi contagion?

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How low can Ethereum price drop versus Bitcoin amid the DeFi contagion?

Ethereum’s native token Ether (ETH) has declined by more than 35% against Bitcoin (BTC) since December 2021 with a potential to decline further in the coming months.

ETH/BTC weekly price chart. Source: TradingView

ETH/BTC dynamics

The ETH/BTC pair’s bullish trends typically suggest an increasing risk appetite among crypto traders, where speculation is more focused on Ether’s future valuations versus keeping their capital long-term in BTC. 

Conversely, a bearish ETH/BTC cycle is typically accompanied by a plunge in altcoins and Ethereum’s decline in market share. As a result, traders seek safety in BTC, showcasing their risk-off sentiment within the crypto industry.

Ethereum TVL wipe-out

Interest in the Ethereum blockchain soared during the pandemic as developers started turning to it to create a wave of so-called decentralized finance projects, including peer-to-peer exchange and lending platforms.

That resulted in a boom in the total value locked (TVL) inside the Ethereum blockchain ecosystem, rising from $465 million in March 2020 to as high as $159 billion in November 2021, up more than 34,000%, according to data from DeFi Llama.

Ethereum TVL performance since 2019. Source: DeFi Llama

Interestingly, ETH/BTC surged 345% to 0.08, a 2021 peak, in the same period, given an increase in demand for transactions on the Ethereum blockchain. However, the pair has since dropped over 35% and was trading for 0.057 BTC on June 26.

ETH/BTC’s drop coincides with a massive plunge in Ethereum TVL, from $159 billion in November 2021 to $48.81 billion in June 2022, led by a contagion fears in the DeFi industry.

Also, institutions have withdrawn $458 million this year from Ethereum-based investment funds as of June 17, suggesting that interest in Ethereum’s DeFi boom has been waning.

Bitcoin struggling but stronger than Ether

Bitcoin has faced smaller downsides compared to Ether in the ongoing bear market.

BTC’s price has dropped nearly 70% to around $21,500 since November 2021, versus Ether’s 75% drop in the same period.

Also, unlike Ethereum, Bitcoin-focused investment funds have seen inflows of $480 million year-to-date, showing that BTC’s drop has done little to curb its demand among institutional investors.

Investment flows into/out of crypto funds by assets. Source: CoinShares

ETH/BTC downside targets

Capital flows, coupled with an increasing distrust in the DeFi sector, could keep benefiting Bitcoin over Ethereum in 2022, resulting in more downside for ETH/BTC.

Related: Swan Bitcoin CEO against crypto lenders: Users are way under-compensated for the risk

From a technical perspective, the pair has been holding above a support confluence defined by a rising trendline, a Fibonacci retracement level at 0.048 BTC, and its 200-week exponential moving average (200-week EMA; the blue wave in the chart below) near 0.049 BTC.

ETH/BTC weekly price chart. Source: TradingView

In a rebound, ETH/BTC could test the 0.5 Fib line next near 0.062. Conversely, a decisive break below the support confluence could mean a decline toward the 0.786 Fib line at 0.027 in 2022, down more than 50% from today’s price.

The ETH/BTC breakdown might coincide with an extended ETH/USD market decline, primarily due to the Federal Reserve’s quantitative tightenig that has recently pressured crypto prices lower against the U.S. dollar. 

— Rekt Capital (@rektcapital) June 25, 2022

Conversely, weaker economic data could prompt the Fed to cool down on its tightening spree. This could limit Ether and the other crypto assets’ downside bias in the dollar market, per Informa Global Markets.

The firm noted:

“Macroeconomic conditions need to improve and the Fed’s aggressive approach to monetary policy has to subside before crypto markets see a bottom.”

But given Ethereum has never reclaimed its all-time high against Bitcoin since June 2017 despite a strong adoption rate, the ETH/BTC pair could remain under pressure with the 0.027-target in sight.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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