Why cryptocurrencies Bitcoin, Dogecoin and Ether are selling off
Cryptocurrencies like Bitcoin, Ether and Dogecoin took a beating Friday, extending a recent run of wild swings as President Joe Biden is expected to unveil a plan to raise taxes on the wealthiest Americans that would nearly double levies on investment gains.
The losses erased more than $200 billion of value from the cryptocurrency market, according to CNBC, citing data from CoinMarketCap.
Given bitcoin’s meteoric rise in recent years, it could push some investors to sell their positions in an effort to secure their profits at the current capital-gains tax rate.
Bitcoin, the world’s most popular digital coin, slumped 10% to below $50,000, just over a week after it eclipsed $64,000 for the first time. The latest losses pushed bitcoin into a correction, shedding more than 20% from a recent peak of $64,829.
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To be sure, the crypto market is volatile and a drop of more than 10% isn’t unusual in bitcoin. Friday’s gyrations continued a recent volatile streak for the digital asset after it tumbled as much as 15% last weekend, driven in part by regulation concerns before recovering some of its losses.
Ether, the second-biggest digital currency by market value, sank 12% to as low as $2,107.20, a day after hitting a record high of $2,645, according to Coindesk, a Bitcoin-focused media company.
XRP, the fifth-largest cryptocurrency, plunged 18%.
The selling spilled over to smaller coins like Dogecoin, which tumbled more than 20% to as low as 19 cents, according to CoinGecko, a crypto market data site.
It was a sharp reversal after the meme-inspired crypto hit a record of about 45 cents a week earlier following a surge this year where it at one point had rallied more than $8,000% in 2021. Its market cap fell to $29 billion early Friday, after climbing above $50 billion just days before.
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Under Biden’s proposal, the federal capital-gains tax rate would be 39.6% for wealthy individuals earning more than $1 million, up from the current base rate of 20%, according to Bloomberg. The federal tax rates for those wealthy investors could be as high as 43.4%.
That tax rate would apply to returns on assets held in taxable accounts and sold after more than a year. Crypto investors already face a capital-gains tax if they sell the cryptocurrency after holding it for more than a year.
Bitcoin has been one of the best-performing assets in recent years and has advanced more than 70% in 2020. Investors who had bought bitcoin a year ago would be sitting on a 575% gain, according to Bloomberg. For investors who bought it in April 2019, that gain would be around 800%.
“Sticker shock over some of these tax figures will be hard to shake off for some investors,” Edward Moya, senior market analyst at foreign-exchange trading service OANDA, said in a note. “Some traders are looking for an excuse to lock-in profits and they might choose to use this tax story as their catalyst.”
To be sure, bitcoin was already facing pressure recently following a sharp run up to Coinbase’s blockbuster public debut on the Nasdaq last week. It was viewed as a landmark event for the cryptocurrency industry.
The sharp rise in the value of bitcoins recently has led to worries of a potential bubble in the cryptocurrency market, some analysts warn, with bitcoin at one point more than doubling since the start of 2021.
There have also been growing concerns about a regulatory crackdown on bitcoin. Turkey’s central bank banned the use of cryptocurrencies from the end of April, saying crypto payments came with “significant risks.” India is also reportedly set to propose a law banning cryptocurrencies, fining anyone trading in the country or holding such digital assets.
If bitcoin isn’t able to break back above the $60,000 threshold soon, momentum signals will collapse, which would lead to a decline in bitcoin’s value, according to strategists at JPMorgan Chase.
“Over the past few days Bitcoin futures markets experienced a steep liquidation in a similar fashion to the middle of last February, middle of last January or the end of last November,” Nikolaos Panigirtzoglou, analyst at JPMorgan, said in the report. “Momentum signals will naturally decay from here for several months, given their still elevated level.”
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