Bitcoin and other cryptocurrencies suffered hefty losses on Friday on concern that US President Joe Biden’s plan to raise capital gains taxes will curb investment in digital assets.
The selloff came after reports that the Biden administration is planning a raft of proposed changes to the US tax code, including a plan to nearly double taxes on capital gains to 39.6 percent for people earning more than $1 million (roughly Rs. 7.4 crores).
Bitcoin, the biggest and most popular cryptocurrency, slumped 5 percent, falling below the $50,000 (roughly Rs. 3.6 crores) mark for the first time since early March, while smaller rivals Ether and XRP fell around 7 percent.
The tax plans jolted markets, prompting investors to book profits in stocks and other risk assets, which have rallied massively on hopes of a solid economic recovery. Levies on investment gains were reported to be in line for record increases.
“Bitcoin headed South today after President Biden signalled that he wanted to raise capital gains tax in the US,” said Jeffrey Halley, senior market analyst, Asia Pacific, at OANDA. “Now whether that happens or not, many Bitcoin investors are probably sitting on some substantial capital gains if they stayed the course over the past year.”
“I firmly believe that developed market regulation and/or taxation remain the crypto markets’ Achilles Heel,” he added.
Bitcoin is on track for a 15 percent loss on the week, though it is still up 65 percent since the start of the year. Ether dropped more than 10 percent on the day to as low as $2,107 (roughly Rs. 1.5 lakhs), a day after climbing to a record $2,645.97 (roughly Rs. 2 lakhs).
But while social media lit up with posts about the plan hurting cryptocurrencies, and individual investors complaining about losses, some traders and analysts said declines are likely to be temporary.
“I don’t think Biden’s taxes plans will have a big impact on Bitcoin,” said Ruud Feltkamp, CEO at automated crypto trading bot Cryptohopper. “Bitcoin has only gone up for a long time, it is only natural to see a consolidation. Traders are simply cashing in on winnings.”
Others also remained bullish on Bitcoin’s long term prospects, but noted it might take time before prices start increasing again.
“There are reasons to believe the overall trend will remain bullish unless the price drops below $40k,” said Ulrik Lykke, executive director at crypto hedge fund ARK36. “At the moment, we are not convinced that the trend will reverse into a bear market but we acknowledge it may take some time before the demand overtakes the supply again in the medium to short term.”
Shares of cryptocurrency exchange Coinbase also fell around 4 percent to $282 (roughly Rs. 21,100) in US pre-market trading, marking the lowest level since its listing earlier this month. The listing had driven Bitcoin prices to $65,000 (roughly Rs. 48.7 lakhs), before pulling back 25 percent in the following days.
“The Coinbase listing – the ultimate poacher-turned-gamekeeper moment – might have been the high watermark for Bitcoin,” said Neil Wilson, chief market analyst at Markets.com.