Since its inception in 2009, the price of bitcoin has risen sharply, climbing from zero to more than $2,900 earlier this month. However, the cryptocurrency has experienced this appreciation during a time of low interest rates and meager yields, a situation that could change in the coming years.
This period of ultra-low yields has lowered the opportunity cost associated with investing in bitcoin. While bitcoin's price has thrived in this environment, investors could find the cryptocurrency less attractive if interest rates and yields push higher.
Should yields, including dividend payments (regular payments made to stockholders for being owners of a company) increase, it could produce one more headwind for bitcoin's price by making dividend-paying stocks more appealing than the cryptocurrency. And all this seems to align with other challenges, such as the scaling issue, that the protocol is facing, which could also put downward pressure on the cryptocurrency's price.
Tax cuts and their effect
One of the reasons dividend payments could increase is because of the momentum to reform corporate income tax. If reform happens, lawmakers would be giving businesses fatter coffers, making it easier for them to reward investors through larger dividend payments.
Notably, US Republicans have proposed a major overhaul of corporate income tax, which would cut the rate to 15%.
This reform could significantly bolster the financial resources of companies, making it easier for them to hike dividend payments, again, making these types of investments more lucrative than bitcoin and other cryptocurrencies.
Furthermore, President Donald Trump has made lowering the corporate income tax rate – which is currently the highest of any Organization for Economic Co-operation and Development nation at 35% – a key part of his tax policy initiatives. Currently, both the House and Senate have Republican majorities, which might give him a better chance of successfully enacting the proposals.
"The likelihood of something getting passed this year is high," said Eric Ervin, president and CEO of Reality Shares, which focuses on dividend investing. While "the timing is uncertain ... we have the right legislature and presidency" to get tax cuts passed, he asserted.
While, many of bitcoin's libertarian-leaning supporters (whose mantra is commonly "taxation is theft") might see tax cuts in a positive light, for bitcoin's price, these cuts could be unfavorable.
Repatriation-based price loss
A second tax reform proposed by Republicans would allow global companies to repatriate – or bring home – foreign earnings at a tax rate of 10%, far lower than the current rate.
According to FactSet data, during the 12 months through Q3 2016, S&P 500 companies paid out roughly $431bn-worth of dividends. This figure could increase sharply if companies can repatriate more of their foreign earnings.
Reality Share's Ervin said:
Effectively, companies that historically parked their money in countries with lower tax rates could bring that money back home and use it to pay out higher dividends, making investors less likely to put their money in bitcoin.
Anthony Parent, the founding partner at law firm, Parent and Parent LLP, agreed with that sentiment. With more foreign funds available, companies will increase dividends right away, he said, which is likely to have a negative impact on bitcoin's price.
However, bitcoin could come out of this unscathed. Kevin Quigg, chief strategist for investment manager ACSI Funds, said he doesn't expect the bolstering of company dividends to be the "primary result" of overhauling corporate tax.
But instead of increasing dividends, companies might use the additional resources to hire new workers, purchase new equipment or find new capital.
As a result, it remains uncertain whether the bitcoin price would significantly suffer from tax reforms. Not only that, but reforms might be easier said than done in a combative Washington, DC, environment.
Quigg told CoinDesk:
And without these dividend-bolstering tax reforms, bitcoin and other cryptocurrencies will continue to shine in the low interest rate and yield environment.
Such developments, it should be noted, would only impact one country as well, and bitcoin is seeing robust inflows from China and Japan in recent months.
All in all, should lawmakers fail to pass the tax overhauls, it could provide tailwinds for bitcoin – which has frequently been seen as a safe haven asset for those concerned about macroeconomic turmoil.