The value of most cryptocurrencies has plummeted in recent weeks, wiping out billions of dollars of wealth.
And instead of hurting cryptocurrency enthusiasts the most, as previous crashes have, the impact was widely felt.
Cryptocurrencies have seen their popularity skyrocket during the pandemic, pulling in countless celebrity endorsements and being integrated into multiple asset portfolios.
Cryptocurrency and blockchain-based technology like non-fungible tokens (NFTs) are now popping up everywhere from evening talk shows to Matt Damon commercials. Athletes like Odell Beckham Jr. and mayors like New York’s Eric Adams (D) have even chosen to have their salaries converted to cryptocurrency.
While banks and brokers once despised cryptocurrencies, a growing number of them now offer purchasing and custody services. The recovery has also helped several start-ups, including Robinhood, to re-emerge and has even pushed some blockchain-centric companies to apply for national banking licenses.
It has made the price declines in the last week, where both bitcoin and ethereum dived over 40 percent from their heights, all the more damaging.
With the tax reporting season underway, many minus investors are preparing for massive tax bills on gains they may no longer have.
“One of the main misconceptions about crypto is that people think it’s anonymous, so regulators have no way of knowing what you’re doing in the crypto space. But that’s not the reality,” said Shehan Chandrasekera, a state official. Auditor and Head of Tax Strategy at CoinTracker.io, a cryptocurrency tax compliance software company.
Cryptocurrencies are treated according to the same tax rules that apply to stocks, bonds and other investment products. Investors who bought cryptocurrencies with dollars last year do not have to pay tax on those purchases before selling or trading these coins. Chandrasekera said investors who bought cryptocurrencies at a higher price than they are currently worth can even sell those coins now and apply the loss as a rebate on their 2022 taxes.
But taxpayers who sold, extracted or exchanged cryptocurrencies in 2021 may have to pay either capital gains tax or income tax on these transactions. Taxpayers who quickly used up their cryptocurrencies, reinvested them, or lost much of their net worth during the recent crash may have trouble paying these bills, depending on when those transactions took place and the state’s tax rates.
Crushing the overall tax burden of cryptocurrency transactions can also be daunting and at times impossible for unknown investors, Chandrasekera said. Most cryptocurrency exchanges do not provide users with annual tax return information for their transactions, as stockbrokers or other trading platforms do, he said. The frequency of peer-to-peer cryptocurrency transactions and trades of one currency to another are also unique tax issues for the cryptocurrency sector.
“It’s virtually impossible to reconcile these transactions, especially if you have multiple wallets,” he said, referring to virtual storage systems used to hold cryptocurrencies.
The widespread use of cryptocurrency raises questions about its security as an asset going forward, both because of its volatility and vulnerability to fraud.
The major cryptocurrencies have endured several sharp exchange rate fluctuations before this week’s collapse.
Bitcoin lost over half of its value, and Ether, the second most traded token, fell more than 25 percent in the first month of 2018.
While both collapses had some external causes – potential regulation in the US and foreign trade repression – some of the volatility comes down to the nature of the assets.
Unlike traditional currencies such as the dollar or the euro, cryptocurrencies are not widely accepted in exchange for goods or services.
University of New Haven finance professor David Sacco describes them as a “speculative stockpile of wealth” rather than a real currency.
“Crypto is basically more like digital gold,” he told The Hill in a phone interview.
Until there is a more widespread use of cryptocurrency applications, be it the purchase of NFTs or the use of blockchain technology for contracts, investors recognize that price fluctuations are likely to remain a feature of cryptocurrency.
“Volatility will be there until there is a full adoption with concrete use cases,” said Eloisa Marchesoni, founder of the cryptocurrency consulting firm Def.Ai Inc. “And we do not see that at all yet.”
Cryptocurrency supporters are quick to point out that the overall growth trends have generally been positive, although for the waves of investors who have bought during the recent rise, it is unlikely to provide much consolation.
Smaller coins can be even more volatile. Many of the thousands of tokens that have been launched since bitcoin have apparently risen out of nowhere, only to get tied up a few days later.
The sources of fluctuation for this kind of coins may be even less tied to economic realities than the large ones. A single tweet from a prominent figure in the crypto community can increase the value dramatically.
Last October, the Dogecoin spinoff shiba inu coin rose 30 percent after Tesla’s CEO Elon MuskElon Reeve MuskThe Hill’s Morning Report – Democrats sense the possibility of SCOTUS vacancy Musk says’ Canadian truckers rule ‘ahead of drivers’ protest over COVID-19 vaccine mandate On The Money – Economy grows after recession in 2021 MORE tweeted a picture of his dog with the text “Floki Frunkpuppy”. A few weeks later, he sent the price down 20 percent by revealing that he did not own any SHIB.
Several other so-called shitcoins have had similar leaps without links to material changes. When rep. Brad ShermanBradley (Brad) James Sherman Presents our future beyond the climate crisis Overnight Defense & National Security – Congress begins Afghanistan by grilling US says about 1,500 citizens remain in Afghanistan MORE (D-Calif.) Jokingly mentioned hamstercoin during a hearing in December, the value of the tokens doubled and then fell into craters within a day after investors dumped their assets.
Cryptocurrency has also proven to be a fertile arena for scammers and hackers.
Scammers took a record $ 14 billion in 2021 cryptocurrency, according to a January report by blockchain analytics firm Chainalysis, which saw much of the increase in the growing popularity of decentralized financing platforms.
Cryptocurrency fraud has flourished on social media. The Federal Trade Commission noted in a statement on the record number of online scams reported last year that “social media is a tool for investment fraudsters, especially those involving counterfeit investments in cryptocurrency – an area that has experienced a massive increase in reports. “
The site has also been found vulnerable to hacks. There were more than 20 hacks last year in which more than $ 10 million in virtual assets were taken, according to NBC News.
Last week, more than $ 30 million worth of assets were stolen from digital wallets on the stock market Crypto.com, which recently acquired the naming rights to the Los Angeles Lakers’ arena.
The company has said it has adopted new security measures in the wake of the hack, but has not publicly shared what they look like.
Proponents of cryptocurrency say that potential buyers should follow basic investment rules before jumping in: do careful research, diversify your holdings and focus on time in the market instead of quick returns.
JW Verret, professor of finance at George Mason University and former senior adviser to the House Financial Services Committee, argued that price fluctuations alone are no reason to crack down on industry.
“It’s probably easier to support a sector under a bull market. But that does not mean that a bear market requires a regulatory solution, ”said Verret.
“If someone buys a token alone because of a celebrity approval alone, it’s a stupid decision, but you can not remove stupid decisions.”
Still, Verret said policy makers and regulators should provide more educational resources to potential investors, establish clear expectations and adjust tax laws to facilitate the use of cryptocurrencies for transactions.
“The growing retail interest, growing young demographic interest and growing interest across the political spectrum has been exponential and it will have political consequences,” he said.
“We are already seeing moderate Democrats interested in crypto. I think it will grow and I think the aggressive anti-crypto votes will be drowned out.”