Crypto Volatility Hits Banks, Celebrities, and Everyday Investors
The value of most cryptocurrencies has plummeted in recent weeks, wiping out billions of dollars in wealth.
And instead of primarily hurting cryptocurrency enthusiasts, like previous crashes, the impact was widely felt.
Cryptocurrencies have seen their popularity skyrocket during the pandemic, attracting countless celebrity endorsements and being incorporated into more asset portfolios.
Cryptocurrency and blockchain-based technologies, such as non-fungible tokens (NFTs), are now popping up everywhere, from late-night talk shows to Matt Damon commercials. Athletes like Odell Beckham Jr. and mayors like Eric Adams (D) of New York have even chosen to have their salaries converted into cryptocurrency.
While banks and brokers once looked down on cryptocurrencies, a growing number now offer buy-and-custody services. The boom has also helped propel several start-ups, including Robinhood, to new prominence and has even caused some blockchain-centric companies to seek national banking licenses.
That made last week’s price declines, where bitcoin and ethereum plunged more than 40% from their highs, all the more damaging.
With tax filing season underway, many investors in the red are bracing for massive tax bills on gains they may no longer have.
“One of the biggest misconceptions about crypto is that people think it’s anonymous, so regulators have no way of knowing what you’re doing in the crypto space. But that’s not the reality. said Shehan Chandrasekera, CPA and head of tax strategy at CoinTracker.io, a cryptocurrency tax compliance software company.
Cryptocurrencies are treated under the same tax rules as those applied to stocks, bonds and other investment products. Investors who bought cryptocurrencies with dollars last year will not have to pay taxes on those purchases until they sell or trade those coins. Chandrasekera said investors who bought cryptocurrencies at a higher price than they are currently worth can even sell those coins now and apply the loss as a rebate on their 2022 taxes.
But taxpayers who sold, mined, or traded cryptocurrencies in 2021 may have to pay either capital gains taxes or income taxes for those transactions. Taxpayers who quickly spent their crypto profits, reinvested them, or lost a large portion of their net wealth in the recent crash may find it difficult to pay these bills depending on when these transactions took place and the rates of state taxation.
Reducing the total tax burden of cryptocurrency transactions can also be daunting and sometimes impossible for unfamiliar investors, Chandrasekera said. Most cryptocurrency exchanges don’t provide users with annual tax return information for their trades like stockbrokers or other trading platforms do, he said. The frequency of peer-to-peer cryptocurrency transactions and coin-for-coin exchanges are also unique tax issues for the cryptocurrency industry.
“It’s virtually impossible to reconcile these transactions, especially if you have multiple wallets,” he said, referring to virtual storage systems used to store cryptocurrencies.
The widespread adoption of cryptocurrency raises questions about its security as an asset in the future, both due to its volatility and its vulnerability to fraud.
Major cryptocurrencies suffered several precipitous price swings ahead of this week’s crash.
Bitcoin lost more than half of its value and Ether, the second most traded token, fell more than 25% in the first month of 2018.
Although both collapses have external causes – potential regulation in the United States and foreign trade crackdowns – some of the volatility comes down to the nature of the assets.
Unlike traditional currencies like the dollar or euro, cryptocurrencies are not widely accepted in exchange for goods or services.
University of New Haven finance professor David Sacco describes them as a “speculative store of wealth” rather than real money.
“Crypto is more like digital gold,” he told The Hill in a phone interview.
Until there is more widespread adoption of cryptocurrency applications, whether buying NFTs or using blockchain technology for contracts, investors recognize that price swings are likely to remain a feature of cryptocurrency.
“The volatility is going to be there until there’s full adoption with real-world use cases,” said Eloisa Marchesoni, founder of crypto advisory firm Def.Ai Inc. “And we don’t. don’t see at all yet.”
Cryptocurrency proponents are quick to point out that overall growth trends have been generally positive, although for the waves of investors who bought during the latest run-up this fact is not likely to provide a lot of comfort.
Small coins can be even more volatile. Many of the thousands of tokens that have been launched since bitcoin seemed to come out of nowhere only to hit rock bottom a few days later.
The sources of fluctuation of this type of coins can be even less related to economic realities than the main ones. A single tweet from a prominent figure in the crypto community can dramatically increase the value.
Dogecoin-derived shiba inu coin jumped 30% last October after Tesla CEO Elon MuskElon Reeve MuskCrypto Volatility Hits Banks, Celebrities and Everyday Investors tweeted a photo of his dog with the caption “Floki Frunkpuppy”. A few weeks later, he dropped the price by 20% by revealing that he didn’t own any SHIBs.
Several other so-called shitcoins had similar jumps unrelated to material changes. When the rep. Brad ShermanBradley (Brad) James ShermanCrypto Volatility Hits Banks, Celebrities, and Everyday Investors Framing Our Future Beyond the Climate Crisis Defense and National Security Overnight – Congress Begins Grilling Afghanistan MORE (D-California) jokingly mentioned hamstercoin during a December hearing that the token’s value doubled and then crashed within a day after investors dumped their assets.
Cryptocurrency has also proven to be a fruitful arena for scammers and hackers.
Scammers took a record $14 billion cryptocurrency in 2021 according to a January report by blockchain analytics firm Chainalysis, which attributed much of the increase to the growing popularity of decentralized finance platforms.
Cryptocurrency scams have proliferated on social media. The Federal Trade Commission noted in a statement on the record number of online scams reported last year that “social media is a tool for fraudsters in investment scams, especially those involving fake investments in cryptocurrency – an area that has seen a massive increase in reports”.
The space has also proven vulnerable to hacks. There were more than 20 hacks last year where more than $10 million in virtual assets were stolen, according to NBC News.
Just last week, more than $30 million in assets were stolen from digital wallets on the Crypto.com exchange, which recently acquired the naming rights to the Los Angeles Lakers arena. .
The company said it adopted new security measures following the hack, but has not publicly shared what they look like.
Cryptocurrency advocates say potential buyers should follow basic investing rules before jumping in: do diligent research, diversify your holdings, and focus on time in the market rather than returns fast.
JW Verret, professor of financial law at George Mason University and former senior counsel for the House Financial Services Committee, said price swings alone were not a reason to clamp down on the industry.
“It’s probably easier to support a sector during a bull market. But that doesn’t mean a bear market requires a regulatory fix,” Verret said.
“If someone buys a token just because of a celebrity endorsement, that’s a stupid decision, but you can’t regulate stupid decisions.”
Even so, Verret said policymakers and regulators should provide more educational resources to potential investors, set clear expectations, and adjust tax laws to make it easier to use cryptocurrencies for trading.
“The growing interest in retail, the growing youth demographic and the growing interest across the political spectrum has been exponential and that is going to have policy implications,” he said.
“We are already seeing moderate Democrats interested in crypto. I think that will grow, and I think the aggressive anti-crypto voices will be drowned out.