Bitcoin, since surging to new all-time high earlier this month, has continued to face a string of bad news. Earlier last week, Bitcoin prices tumbled due to Xianjiang crypto miners shutting down due to power outages — causing a record $10 billion in futures liquidations.
Now, fears over President Biden’s proposed capital gains tax hike and potential crypto regulations are sending Bitcoin even lower.
Bitcoin fell as far as $47,700 or 11% intraday, while other major cryptocurrencies Ethereum (ETH) and Binance Coin (BNB) suffered similar losses. The NASDAQ index saw a much more modest loss of -0.94%.
According to figures from ByBit, the crypto futures market saw $3.95 billion in liquidations in the past 24 hours. Bitcoin’s total market capitalization also dipped below $1 trillion — shedding $300 billion in a matter of hours.
Bitcoin dropping below the $50,000 support level may be a sign that bearish sentiment is setting in — pushing the cryptocurrency into further correction.
Explaining Bitcoin’s Recent Price Action
The weekend’s sell-off was exacerbated when news of President Joe Biden’s latest capital gains tax reform broke.
Per Reuters, Biden called for increasing the top income tax rate by 2.6% — up to 39.6% from 37%. More importantly, he proposed to nearly double taxes on capital gains to 39.6% for individuals earning more than $1 million. (Current tax rates for long term holders in the tax bracket of $450,000 or more is 20%.)
In the United States, the Internal Revenue Service (IRS) categorizes cryptocurrencies as an asset — meaning that taxpayers must declare all crypto transactions and gains. Jeffrey Halley, senior market analyst at Oanda, told the Wall Street Journal:
“It is clear that Bitcoin is more sensitive to capital gains tax threats than most ‘asset’ classes. The threat of regulation, either directly in developed markets or indirectly via the taxman, has always been crypto’s Achilles heel, in my opinion”
BTC Continues to Trade at Extreme Volatility: What’s Next?
Part of the reason why Bitcoin has continued to remain highly volatile is because of the futures market and traders making high leverage bets. But institutional investors have continued to accumulate coins, and the circulating supply is more limited than ever — so what gives?
Oftentimes, overleveraging in the derivative market leads to the spot market overheating and overreacting. The average perpetual funding rate rose as high as 0.09% this month, dropping back down to a more reasonable 0.016% following mass liquidations. Some exchanges such as FTX and Kraken even saw their funding rates turn negative.
Historically, a cool down in funding rates lead to short-term increases. More likely than not, Bitcoin, alongside the broader crypto market, will recover in due time.
Featured image from UnSplash
