Bitcoin Prices Drop Slightly: It May Not Be a Bad Thing Though

The bitcoin prices plummeted to $56,000 on November 19, the lowest since October. This is a significant drop after the prices skyrocketed over $68,000 after launching the new exchange-traded fund ProShares earlier in October. After President Joe Biden signed the $1.2 trillion infrastructure bill, the bitcoin prices suddenly went down, bringing new legislation for crypto investors. This new bill includes the changes in tax provisions for cryptocurrency transactions. Other cryptocurrency coins like Ethereum, Dogecoin, and Shiba Inu followed a similar pattern. Most of these coins went down by 17% after the spike in their value in October.

Earlier this year, bitcoin prices dropped abruptly after China outlawed bitcoin mining in July. This has resulted in a mass exodus of crypto miners from China to the United States, making the US the hotspot for bitcoin mining. This might have seen a slight turn-off for Chinese miners, but their movement to the US has given them far greater and better opportunities for mining. Some are already exploring greener and more sustainable ways for bitcoin mining, benefitting from the US’s readily available renewable energy sources. Besides that, several states like Texas have a positive outlook towards bitcoin and bitcoin miners, giving these Chinese miners an impetus to move to the States and carry on their mining operations. This demonstrates that the drop in bitcoin was not necessarily a bad thing; instead, it encouraged miners to adopt more innovative and sustainable solutions. Similarly, the recent decline in prices may be just a rough patch in the stream of broader  adoption of cryptocurrencies.

What Caused This Crash?

It seems like no one singular factor led to this recent crash; instead, it was an amalgamation of many reasons. First of all, the infrastructure bill was signed this month, under which the cryptocurrency exchanges are required to report crypto transactions to the Internal Revenue Service (IRS). This will ensure that the crypto investors report their crypto exchange activity rigorously and avoid any taxes. While cryptocurrency has been recognized as a taxable property for a long time, many crypto investors found loopholes and did report their crypto activity ultimately, thus making substantial tax gains. Under this new law, crypto tax evasion is expected to go down. Within hours after President Biden signed the infrastructure bill, bitcoin and ethereum suffered big drops. While the price of bitcoin dropped below $59,000, ethereum also plummeted below $4,200. However, there was a slight increase in their prices the next day.

Secondly, the Securities and Exchange Commission recently rejected the application of VanEck, a global investment manager, to launch a spot bitcoin exchange-traded fund. The SEC said that bitcoin is too volatile to market manipulation, so a spot bitcoin exchange-traded fund cannot go live. SEC claimed that it could lead to fraud and manipulative practices in the crypto space. It pointed out that a future-backed ETF like ProShares is better for investors because it gives investors an experience in bitcoin trading without actually holding the highly volatile asset, making it a much safer choice. However, the crypto enthusiasts and advocates were disappointed with this rejection. SEC requires any exchange to have a comprehensive surveillance mechanism to prevent money laundering and other fraudulent activities. The ETF proposed by VanEck did not meet this requirement, so it was not approved. But it might not be a bad thing for crypto space after all. Greater regulation means the government is considering cryptocurrency as a real asset class. This could bring greater legitimization and mass adoption of cryptocurrencies.

Thirdly, Ned Segal, CFO of Twitter, was pessimistic about cryptocurrencies saying that “investing in crypto assets does not make sense.” Since cryptocurrencies are highly volatile, such tweets can also lead to price swings. This was evident earlier when Elon Musk, founder of Tesla, encouraged people to invest in bitcoin and dogecoin. The prices of cryptocurrencies surged at that time as well. Besides that, the bitcoin drop has been exacerbated by the short-term crypto investors selling their cryptocurrency, leading to a further decrease in bitcoin’s value. At the same, the value of the dollar has strengthened against other fiat currencies and cryptocurrencies due to an increase in interest rates. This is supposed to control inflation.

What Should Investors Do?

Investors should not be too worried about these little highs and lows. Cryptocurrency is a volatile asset class, and such swings are expected. Long-term investors should keep holding cryptocurrencies and avoid worrying. Crypto experts recommend that you should limit your crypto investment to 5% of your investment portfolio. If the crypto crash forces you to change your investment strategy, try not to make a rash decision. Consider your financial goals and long-term investment plans if you want to make any changes in your investment strategy. If you let your emotions dictate your decision during the crash, you will likely regret them later. You should only invest the amount that you are okay to lose.

This year, the prices of cryptocurrencies have seen quite a few highs and lows after many major events like China’s crackdown, Elon Musk’s tweets, and the launch of the new ETF. This shows that cryptocurrencies are still highly speculative. This is expected that bitcoin and other cryptocurrencies will gain more excellent stability once their utility is expanded. Right now, you cannot buy everything with cryptocurrencies. But the time is not that far away. With companies like Tesla, Visa, and even major banks looking to explore the crypto space, it is expected that their utility will increase, and so will stability. Therefore, you should not concern yourself much with such tiny drops in bitcoin prices; instead, focus on your long-term investment strategy. Even after the price drop, the value of cryptocurrencies is higher than they were last month.

Author bio

Ian Kane is the Co-Founder at Unbanked, a global fin-tech platform built on blockchain. Kane has worked in technology & digital media for over 10 years with a heavy focus on business development, sales, and strategy. His diverse professional background enables him to bring unique insight and experience to every challenge he takes on.