The price of bitcoin fell below the US$50,000 mark at the end of this week. Cryptocurrencies have lost considerable momentum in the second half of April. Many retail investors may have been burnt as digital currencies have been thrust into the mainstream in late 2020 and early 2021. Today, I want to discuss why bitcoin has crashed in the latter half of April. Is it worth buying on the dip? Let’s dive in.
The tax man is coming for crypto
Back in March, I’d discussed Ray Dalio’s warning on bitcoin and the broader crypto market. Dalio predicted that a regulatory crackdown was on the horizon for cryptocurrencies. At the same time, he said that the market had proven itself in the mainstream.
In late March, the Canada Revenue Agency (CRA) won in a court battle to access a trove of high-value customer data held by the crypto exchange Coinsquare. The exchange was forced to disclose information on an estimated 5% to 10% of its 400,000 customers to the CRA. Tax collectors are also on the march in the United States.
This week, rumour swirled that Joe Biden’s administration aimed to double capital gains to 39.6% for people earnings more than $1 million. That announcement precipitated a sharp decline for bitcoin and its peers in the crypto space.
Why bitcoin could buckle under new regulations
Tax concerns are not the only factor that have stirred volatility for cryptos. Early this week, I’d explored bitcoin’s dip over the last weekend. Mainly, I’d discussed the speculation that a regulatory crackdown on digital currencies was forthcoming. Jesse Powell, the CEO of crypto exchange Kraken, predicted that there would be “some crackdown” going forward.
Regulatory crackdowns had a major impact on bitcoin’s last headline-grabbing bull run in 2017 and early 2018. International regulators took notice. In some cases, nations looked to target digital currencies as a facilitator for criminal activity. In truth, illicit activity makes up a tiny fraction of crypto transactions.
Officials are increasingly referring to bitcoin and its peers as “alternative investments” rather than as a competing currency. Still, the big crackdown on bitcoin remains highly speculative at this stage.
Should you buy the dip or avoid this storm?
Bitcoin has enjoyed a huge bull run over the last half year. However, it has remained volatile even as it has gained momentum. Investors who bought into its previous dips have been richly rewarded.
In February, Canada launched the first-ever bitcoin-focused exchange traded fund on the TSX Index. The Purpose Bitcoin ETF (TSX:BTCC.B) aims to track the performance of the world’s largest digital currency. Shares of this ETF were down 6.2% in late morning trading on April 23. It has dropped 8.1% since its inception.
Bitcoin’s performance has been very impressive over the past year. However, the broader market has also been red hot. While bitcoin is exciting, my position has always been that it is too volatile to pin your hopes on when there are so many other equities that offer explosive growth.
