BitCoin- the digital currency that took the world by storm last year for its enormous return (more than 100% return in matter of days or even an hour) took a big hit last week. After reaching an all time high of $ 19,783.06 in December 2017, it was trading at just $6400 a piece last week. So how did the most promising digital currency fail ?
Is it the next too big to fail digital asset? Does it’s failure affect world economy?
Read on to find out more!
Reasons for the crash
- Income Tax Return – The IRS (Internal Revenue Service) in 2014 made an announcement, making cryptocurrency a property or a digital asset rather than a digital currency, which makes it taxable. Hence, all the gains that were made with Bitcoin are taxable.
Moreover, BitCoin received through mining is also taxable as an ordinary source of income, based on “fair market value” at the date that BitCoin was mined. So, how does this become a reason for it’s crash in 2018?
US Investors were selling off their investments in Crypto to pay off Capital Gains Tax before they file their April Taxes.
Let’s say A invested Rs 200,000 in BitCoin last year and its value appreciated to Rs. 10,00,000. So there is a profit of Rs 800,000 to report. Now, as per IRS if one holds BitCoin or for matter of fact any Crypto for more than one year, it will be liable for what the IRS says is Long Term Capital Gain and tax rate for this gain is approximately 15 to 23.8% compared to the situation where if BitCoin is bought and sold in the same year, then IRS refers it as a Short Term Capital Gain and the tax rate for this gain is as high as 39% depending on the tax bracket.
As a rational human being A may hold, and after a year of fall in market value, your asset’s price goes down to Rs. 400,000, so now A will have Rs. 600,000 Capital Loss to claim but as we know capital loss carryover moves forward than backward so A has to cash out his asset to pay the tax, thus there was a huge selloff which dipped the price of BitCoin(BTC).
2. Google Banning Crypto Advertisement – The leading search engine updated it’s financial services related ad policies wherein it banned any crypto related advertising– be it advertisement of upcoming ICO (Initial Coin Offerings), wallets or any trading platform for the currencies. After this change in the policy price Bitcoin fell by $500 within a six hour time span.
3. 52 week Low ICO Funding – For those who have no idea about what an ICO is, it’s just like an IPO but here tokens or coins are given to the investor for Bitcoin or Ether(ETH) instead of Cash.
Total amount raised from ICO’s last month around the globe was just $326 million, which was the lowest figure in more than a year. This low confidence can also be attributed to the depreciation in value of BTC and ETH.
4. ETH Selloff – As ICO’s take place, an investor pays Ether or Bitcoin to the promoter or the white paper solution provider. So what if the solution provider wants cash or any fiat money that would make his white paper solution a reality. They need to cash out, and this what dipped the price of Ether last week. A number of solution providers cashed out their Ether which caused the market to fell by 20%.
Does the failure of Bitcoin affect World Economy?
The Top 10 Cryptocurrency Index or in geeky terms the so called MVIS CryptoCompare Digital Assets 10 Index had fallen by 80%.
In comparison to the above Cryptocurrency fall, the Nasdaq Index of High Tech US Shares fell by 78 Percent from its peak in March 2000 to its trough in 2002.
What we need to consider here is that the value of the cryptocurrencies at their peak last year was $831Billion. The value of the companies on Nasdaq at their peak in 2000 was $6,600Billion.
Interestingly, the loss of the IT Stocks in the Dotcom bubble was 8 times the current cryptocurrency market, the loss increases to 10 times when accounted for inflation.
After the heavy winds from the north, the market capitalisation of cryptocurrency market is just $186Billion whereas the Market Capitalisation of NASDAQ is $15,370 Billion.
As per a CNBC report, only 8% of the Americans have invested in cryptocurrencies as of March 2018, but during the Dotcom bubble, a high proportion of Americans were invested in the IT Stocks.
Irrational Exuberance could be the reason for the large rise in the interest for IT and Crypto in their respective eras. In such situations, greed is a lure which few could have resisted.
What Lies Ahead for the BitCoin ?
Cryptos, if used in the right manner, could revolutionise the way we transact, remove inefficiencies and be the ultimate game changer.
The failing of the Cryptocurrencies isn’t going to be a catastrophic event. They aren’t too big to fail like the American Investment Banks of 2008.
There is no evidence in the history of mankind to prove it, but if it fails and is ultimately not accepted by the generation of today then maybe we might have lost a next-gen technology which could have transformed the way we were meant to transact and move ahead.
It is a well known fact that human beings resist change, but isn’t it the way to move forward and create the next big thing, and in this case, the acceptance of cryptocurrencies and the technology it runs upon?
We leave our readers to ponder upon the above questions and comment below!