Bitcoin and other digital currencies fell sharply on Friday as a wave of selling triggered by US Vice President Joe Biden’s proposed capital gains tax hike.
Bitcoin was down 7.3 percent to $49,730 at midday EST, according to Coin Metrics results. This is the first time since early March that bitcoin has traded below $50,000. Ether dropped to $2,320, a loss of 8%. XRP, the fifth-largest cryptocurrency, fell 16%.
This effectively devalued the entire cryptocurrency market by more than $200 billion, according to CoinMarketCap results.
“The market has risen significantly in the aggregate, and it is likely cooling off ahead of the next leg up,” Vijay Ayyar, head of business growth at cryptocurrency exchange Luno, told CNBC via email.
President Biden is set to increase the long-term capital gains tax on the richest Americans to 43.4 percent, with a surtax included. That is greater than the maximum federal tax rate on wage income. The new tax rate will be applied to returns on assets kept in taxable accounts for more than a year and sold.
This sparked an overnight sell-off in financial markets, with all three big US indices finishing Thursday in the red. According to analysts, concerns about Biden’s capital gains tax plan could be spreading to crypto investors, who have enjoyed a banner year, with the price of bitcoin more than doubling in the last year.
Nonetheless, one cryptocurrency entrepreneur believes Biden might be doing his industry a favor.
“It would make even more sense to use the oldest trick in the book for managing your finances wisely: borrow against your assets to escape capital gains taxes,” Antoni Trenchev, co-founder of cryptocurrency lender Nexo, said.
“And what better collateral than one that appreciates in value like Bitcoin — considering today’s price drop, which was almost certainly triggered by the said proposal?”
Bitcoin has increased by 66 percent in 2021 alone, while ether — the Ethereum blockchain’s digital token — has increased by more than 200 percent.
A portion of the funding has come from institutional investors’ increased purchases of bitcoin. Additionally, firms such as Tesla and Square have purchased bitcoin worth billions of dollars.
Banks are now attempting to facilitate their clients’ participation in the bitcoin industry. Morgan Stanley announced in March that it will open access to three funds that allow bitcoin ownership, according to CNBC.
“Things are becoming more established,” Eric Demuth, CEO and co-founder of Bitpanda, told CNBC’s “Squawk Box Europe” on Friday. “The more capital that enters the economy, the lower the volatility.”
“And for retail investors who are venturing in, the plan is to never place all of your eggs in one basket and to invest only a small portion of your portfolio in cryptocurrencies, specifically bitcoin. It makes no difference whether you are a firm believer or not; diversification of your assets is critical.”
Concerns about a regulatory crackdown on bitcoin, on the other hand, continue to cloud the market. Jesse Powell, the CEO of Kraken, a major cryptocurrency exchange, cautioned that governments could impose restrictions on the use of bitcoin and other cryptocurrencies.
According to Reuters, India is considering enacting legislation that would prohibit the exchange or even possession of cryptocurrencies. In February, US Treasury Secretary Janet Yellen described bitcoin as a “highly risky asset” and expressed concern about investor losses.
Authorities worldwide are examining ways to control bitcoin. Last week, the People’s Bank of China’s Deputy Governor referred to bitcoin as a “investment option,” signaling a change in the country’s attitude toward cryptocurrencies following a fierce crackdown on the industry by regulators in 2017 and 2018.
