There are a number of reasons why Bitcoin has crashed in the past. Some of the major concerns investors have with Bitcoin that lead to selloffs include taxes, cyber security, and regulations.
While Bitcoin’s growth has been rather momentous in recent years, it has also made it difficult to track reasons for why the digital currency experiences sudden significant price drops. The cryptocurrency’s most horrific crashes have all taken place in 2017 and early 2019.
A Recap of Bitcoin’s Price Flux
Compared to last year, Bitcoin’s price has fallen significantly this year. The plunge may not have stopped yet. While some investors are expecting a correction and for the price to rise again, the worst may not yet be over.
Despite the concerns, Bitcoin enthusiasts say that this is not unusual behavior for the digital coin. Historically, the cryptocurrency has experienced rapid losses in a short period of time, but it has not discouraged long term Bitcoin investors. The main concern long term investors have is that regulators may seriously limit or shut down cryptocurrency altogether.
Large Capital Gains Tax
One major selloff point for Bitcoin is in tax season, which is when first time Bitcoin investors are taxed heavily on the cryptocurrency’s profits. Articles detail how Bitcoin investors sell their digital currency quickly before filing taxes. Bitcoin has been heavily taxed after the IRS announced in 2014 that cryptocurrencies are classified as property instead of currency.
The tax surprised investors initially because many first time Bitcoin investors did not have enough Bitcoin to pay taxes on their prior year earnings. The reasonable option was to sell Bitcoin before getting hit with a large capital gains tax.
How to Avoid Major Loss from Capital Gains Taxing
By buying and selling Bitcoin in the short term, investors can only be taxed on short term capital gains. These taxes can go as high as 39% depending on your tax bracket. However, if you plan on holding Bitcoin for more than a year then long term capital gains kick in. Bitcoin is taxed as ordinary income, and the tax rate depends on your income bracket.
Cyber Intrusions and Hacks
Bitcoin usually falls greatly after news of cyber intrusions and hacks on cryptocurrencies break. One example of a Bitcoin crash was when Coinrail, a South Korean exchange, said there was a cyber intrusion and in response Bitcoin fell 6 percent.
Fortune Magazine reports that here is no particular formula to identify why Bitcoin rises and falls the way it does. However, reporters confirm that cryptocurrency selloffs tend to occur after major incidents of hacking take place.
The major plunge in Bitcoin’s price was amplified by the Coinrail hack. While no Bitcoin was stolen, the news could strongly be connected to a Bitcoin crash.
The Coinrail incident was not the only hack that led to the latest Bitcoin price fall and Bitcoin crash. There was at least one more hack at another South Korean exchange that managed to push the digital coin further down.
Rules and Regulations
One of the main reasons why cryptocurrencies are so popular is because they are a deregulated form of payment. The security element coupled with a lack of oversight makes the digital coin a valuable asset in many markets.
News of rules and regulations being placed on Bitcoin as well as other cryptocurrencies leads to noticeable price drops across all these digital coins.
One example of a price drop following regulation happened when U.S. investigators demanded several Bitcoin exchanges to hand over trading data to assist in investigating cryptocurrency price distortions. Investigators suspected some manipulation in prices that was irregular for the cryptocurrency. The news of this investigation contributed to Bitcoin’s significant price drop earlier in 2018.
Investors believe that regulator concerns were the main reason for the latest Bitcoin crash.
While U.S. investors intervened in possible security breaches at Bitcoin exchanges, Japan had a regulatory clampdown on the cryptocurrency during the same period.
This may have been a key reason for the latest Bitcoin crash.
Negative Publicity and News
Just like any regulated stock, Bitcoin is also affected by any negative publicity and news about it. The impact may not be as significant as it would be on stocks, but it can lead to noticeable selloffs.
These selloffs, in turn, harm cryptocurrency prices.
Major investors and bankers like Jamie Dimon and Al-Waleed bin Talal have spoken out against the rise of Bitcoin. Negative news is usually about whether Bitcoin’s meteoric rise is a sign of a bubble. Most critics of the digital coin are keen on calling Bitcoin a bubble and a dangerous investment. Many famous investors have done so on more than one occasion.
Nouriel Roubini, a well-known American economist, called Bitcoin the mother of all bubbles. This statement was taken around the time the digital coin fell 11 percent in 2018.
While negative publicity usually does lead to price drops in cryptocurrency, it may also not have an impact at times. It continues to be hard to gauge price fluctuations in cryptocurrencies, especially around Bitcoin and its growth.
Bitcoin has also fallen in the past due to missing investor expectations on updates as well as other promised changes.
When Bitcoin community developers scrapped plans for an upgrade that would have split the Bitcoin network and made two versions of Bitcoin, the digital coin experience a massive selloff. Bitcoin dropped almost 30 percent over a weekend.
Some of the features that would have been included in the upgrade were reduced transaction fees, transaction confirmations, and network growth.
Other Failed Upgrades Led to Similar Bitcoin Crashes
Similar to stock market changes, when Bitcoin reports failings or shortcomings it has an impact on cryptocurrency prices. Bitcoin investors sell their share in the digital currency when reports show that the future of Bitcoin is changing direction.
Changes in one digital currency, like the potential Bitcoin network split, would lead to ripple effects in other cryptocurrencies based on substitute and complement theory in economics. Bitcoin Cash’s value started rising when Bitcoin announced the network split upgrade.
Changes in a cryptocurrency’s code base leads to new investors entering into the cryptocurrency trade while old investors reevaluate their approach to going long on the digital currency.
Bitcoin vs. Bitcoin Cash
The Bitcoin upgrade was canceled by developers because the Bitcoin network had opposing views on whether Bitcoin should be used as free flowing cash or as a stored value like gold. After the upgrade cancellation, Bitcoin Cash’s price spiked due to many of the Bitcoin investors switching over to the alternative cryptocurrency.
Bitcoin Cash’s premise is to offer an alternative to what the upgrade provided. The Bitcoin Cash users consider the digital currency to be more aligned with free flowing cash than a stored value like gold.
Final Investor Considerations On a Bitcoin Crash
Investors could also make a profit on Bitcoin crashes. Bitcoin price drops happen often enough, and have been more frequent in the last year than any other time period since the cryptocurrency launched.
A Bitcoin investor with a large portion of their portfolio in Bitcoin can hedge their investment by buying future contracts.
Diversifying the digital assets through bonds and cash are also hedges worth considering on the investor’s part. Adding in larger positions in investment funds dealing in multiple cryptocurrency positions using your Bitcoin shares is another way of raising revenue.
The downsides of investing in Bitcoin can be nasty because a Bitcoin crash can happen at any time under the uncertain circumstances surrounding cryptocurrency trading. It is important for investors to know that diversifying their position in cryptocurrency trading would likely lead to higher profits than dealing with a single digital currency. This same position applies to investors in the stock and bond markets.
One consideration in the cryptocurrency market is that there are too many players in the digital space, including Bitcoin miners, Bitcoin investors, and Bitcoin enthusiasts.
Another consideration is that Bitcoin crashes occur under more random circumstances than specific ones, such as botched upgrades and regulation enforcement. Investors should be aware of the risks of their position when investing in Bitcoin.