Written by: Yves, Head of Trading at Wirex
The Bitcoin price lost nearly 2.5% this week, quoting at $46,954 at the time of writing. The main cryptocurrency is still struggling to break its bearish short-term momentum. Market participants are still stunned by last week’s liquidations of a few billion dollars worth of long future contracts. All major capitalizations are still in the red this week except for Avalanche’s native cryptocurrency, AVAX (+18%). The project enjoyed the support of several analysts since Deloitte’s decision mid-November to use it for its disaster-relief platform. AVAX also rallied on Circle’s announcement of the USDC launch on Avalanche three days ago. The smart-contract blockchain is taking serious steps to lead the famous club of Ethereum-killer candidates. Meanwhile, among the top 20 cryptocurrencies by market cap, Ether (-6.8%), DOT (-6.8%), SHIB (-8.17%) and LUNA (-8.65%) were all dragged down with the first cryptocurrency.
The selling pressure was sustained this week by the Fed’s tightening monetary policy. The Federal Open Market Committee (FOMC) participants are now projecting the Fed Funds Rate to be raised to 0.9 on average, with three interest rate hikes expected next year.
Sudden inflation jumps usually weigh on traditional equity markets in the short term as input costs rise (cost of goods sold), and it takes a while for companies to adapt their pricing accordingly. As far as cryptocurrencies are concerned, the tightening of the money supply resulting from increasing interest rates (increased savings) can translate into less capital injected. However, the expected return on investment in the cryptocurrency sector is not really comparable to the traditional economy, now or anytime during the past fifteen years. For instance, the ‘no market risk’ decentralised equivalent of a savings deposit rate would yield 6.33% on USDC (e.g. AAVE Avalanche deposit variable APY + rewards).
The cryptocurrency adoption by institutions has certainly increased correlation with traditional markets. But so far, the long-term dynamics of the sector have always overcome the short term effects of this correlation. The sector was certainly expecting a worse and more immediate decision from the Fed. The surprise was eventually a positive one when we factor in the sharp market adjustment that has already hit the crypto-economy two weeks ago. The FOMC minutes cleared the uncertainty.
The year end is an opportunity for institutions and households to re-balance their cryptocurrency portfolio to optimise their tax burden. There is:
- the wash-sale practice for US taxpayers that consists of selling a losing position to offset their annual income tax and then buy it back shortly after. The current loophole in the US tax rules is expected to be closed soon with the “Build Back Better Act”.
- The offset of short-term gains as long as the capital appreciation falls within a low tax bracket: in the US for instance, capital gains tax is at 0% if taxable income is less than $80,000.
As there are many new joiners this year, and given that Bitcoin is still up 60% this year, tax rules might offer some rare opportunities this month.
The total circulating Bitcoin is now above 18.9 million, above 90% of the total Bitcoin supply limit at 21 million, and still finding enough demand to push it higher. This demand represents practical applications such as El Salvador’s legal tender, but it is first and foremost a priceless concept, upraised by an international community, that is called consensus. Fiat currencies are unfortunately failing too often, like politics, to reach consensus, as trade wars intensified this year. Despite China, India or Russia tightening their policies on cryptocurrencies, we’ve already witnessed countries first backing away and then jumping back in the sector. Aside from this simple ‘consensus’ concept, every member of the crypto community can find a reason to invest and hold. For Ray Dalio, as revealed by yahoo this week:
“the message is cash is going to be a problematic asset. Hold that other diversified portfolio of assets — keep it, looking at it in real terms, not nominal terms. And that diversification should be also international diversification from countries, not just asset classes, in order to have a truly well-diversified portfolio”