History is repeating itself Tuesday as Bitcoin drops under $60,000 for the first time in weeks. In 2017, Bitcoin rallied throughout the fall before crashing in winter. During early trading on Tuesday, the digital standard fell to $58,673 — its lowest price since the start of November.
Bitcoin’s recent rally started in earnest in October. A series of exchange-traded funds tied to crypto futures contracts hit the stock market, bolstering investor sentiment through the second half of October. Things slowed down when the currency’s price encountered resistance above $67,000.
Now, a sell-off is testing price support under $60,000. Crypto bulls have predicted that Bitcoin could double in value before the end of the year, but history suggests the coin’s price is more likely to half than double. There’s more than just history pressing on the currency, too: regulation is looming over crypto once again.
Steen Jakobsen, the chief investment officer for Saxo Bank, told reporters that shaken stakeholder confidence is related to regulation fears. “The weaker sentiment is subscribed to two events with China announcing again that it stands firm on regulation of the crypto industry, contemplating punitive power prices for companies that engage in crypto mining, and secondly the newly signed U.S. infrastructure bill will require new tax requirements of the industry.”
China banned cryptocurrency outright earlier this year, but the country has enforced the law unevenly. This week, China is cracking down on crypto once more, with National Development and Reform Commission spokesperson Meng Wei stating that “full-scale” enforcement is coming soon.
Chinese officials have roundly criticized cryptocurrency for using excessive power. The proof of work model employed by Bitcoin is notoriously inefficient. Critics point out that a single transaction consumes over $100 worth of electricity.
Meng Wei’s statement insists that citizens found mining Bitcoin will face “punitive” energy bills, rattling stakeholders and depressing Bitcoin’s hash rate.
Infrastructure Bill Sparks Taxation Concerns
United States President Joe Biden signed a trillion-dollar infrastructure bill into law Monday, authorizing historic levels of government spending. Federal Reserve officials don’t think the law will immediately stimulate the economy, though. One thing Bitcoin stakeholders are apprehensive about, however, is a provision in the bill related to digital transactions.
The new rule holds that stakeholders must report any digital exchange worth more than $10,000 to the IRS. This rule means that taxation could start applying to crypto transactions, even if they don’t use brokers. Miners and node operators are now apprehensive about possibly facing staggering tax bills for which they are unprepared.
Moreover, changing Federal Reserve policies might offer new challenges for crypto. Bitcoin is considered a strong hedge for inflation, but the Fed might hike interest rates to address monetary devaluation. The dollar’s rate of inflation is at its highest rate since 1990. This rate has helped crypto post new heights this year so far. If the dollar bounces back in 2022, however, Bitcoin will continue to slip.
Sell-offs started Tuesday after Twitter’s CFO, Ned Segal, told the Wall Street Journal that crypto “doesn’t make sense” for the company to hold right now. Instead of holding onto volatile assets like crypto, Segal told reporters, Twitter prefers investments like securities.
Segal’s comments, combined with the new reporting requirements in the infrastructure bill, proved to be enough to spur investors to divest from their crypto holdings. “It’s a combination of long liquidations and market makers getting rid of their risky (bullish) exposure,” Laurent Kssis, the director of CEC Capital, told Yahoo Finance. “Leverage and delta hedging becomes more expensive as more orders flood the market.”
These regulation fears and sell-offs have analysts talking about the potential for a crypto winter. In a nightmare scenario, the selling pressure could force crypto bulls to lower their price support. The recipe for price deflation is a combination of lower investor demand and high supply. How low could Bitcoin go?
“No one wants to see another crypto winter as it is difficult to forget the dire consequences of the previous one. Moreover, what traders have been hoping for is a strong rally especially given the fact that during this time of the year, we usually see a strong rally for cryptos — of course, with the exception of the crypto winter,” writes AvaTrade’s chief market analyst, Naeem Aslam, in a note to clients.
The last cold-weather crash for Bitcoin took place in 2017. After a blistering rally through the fall, cryptocurrencies plunged in the final few months of the year. This crash wiped out millions of dollars from Bitcoin’s market cap.
Now, investors worry that something similar is happening in 2021. Bitcoin isn’t the only cryptocurrency falling on Tuesday. Ether, the second-most-popular crypto standard, is also tanking. Tuesday morning, Ether dropped more than 9%, falling to $4,289 after posting its all-time high, $4,851, last Wednesday. Other popular cryptocurrencies experienced similar drops Tuesday morning.