Why Did the Mid-November Crypto Crash Occur and Its Impacts
Cryptocurrencies experienced a significant crash in mid-November, primarily due to two major factors. This article delves into these causes and the subsequent impacts on the market.
Avoiding Capital Gain Tax
The first reason for the crash revolves around the prudent move of investors to avoid paying hefty capital gains taxes. In the financial year preceding April, individuals often sell off their cryptocurrencies to avoid being taxed on short-term capital gains. Recently, many have realized that they are facing substantial tax obligations and are left with two options: either pay the tax or dispose of their cryptocurrencies.
For those who bought and sold cryptocurrencies within the same fiscal year, they would be taxed at a rate of up to 39% depending on their tax bracket. Airdrops and mining activity are also subject to taxation. Many investors, perceiving the Bitcoin hard fork as an ideal moment to liquidate holdings, chose to sell their cryptocurrencies to avoid these short-term capital gains taxes. Consequently, this mass selling pressure contributed significantly to the crypto market crash.
Bitcoin Cash Hard Fork
The second key factor is the Bitcoin Cash (BCH) hard fork that took place on November 15, 2018. This ideological dispute between the Bitcoin ABC and Bitcoin SV communities led to the creation of two competing chains, Bitcoin ABC and Bitcoin SV. This hard fork event caused considerable uncertainty in the market and may have exacerbated the cryptocurrency market crash.
The hard fork's outcome resulted in a significant drop in the value of BCH, paralleling the decline of other cryptocurrencies. The ensuing hash rate war also added to market volatility and confusion, further pushing investors to sell off their holdings. Investors viewed the Bitcoin Cash hard fork as another opportunity to cash out and avoid the imminent tax burden.
As of April, the market dynamics may shift, potentially leading to a rebound in prices, especially if the crypto community gains more confidence and the market stabilizes.
The Intricacies of Cryptocurrency
Cryptocurrencies like Ethereum (Ether) are a fascinating yet complex blend of algorithms and ideas, often grounded in hope and wishful thinking. Approximately 18 months ago, I decided to purchase 100 Ether as a practical experiment. At one point, Ether was worth over $800, but it has since dropped to $85.
A cryptocurrency is neither a security nor an asset. It represents ownership of a corporation, a debt, or any tangible good. Instead, it is a series of bits with no intrinsic value to anyone for anything. Contrary to a dollar, a cryptocurrency can only exist digitally, unlike a physical bill. While some argue that cryptocurrencies might become a form of currency, the fact is that I have never had the opportunity to spend my Ether.
Similar to gold, which has risen and fallen in value over time, cryptocurrencies can also experience significant fluctuations. Despite its past highs, the value of Ether is now significantly lower. Gold, for instance, has a tangible utility in jewelry and electronics, making it less volatile than cryptocurrencies, which are predominantly speculative in nature. People who bought Ether at its peak price of $2000 might have incurred significant losses.
If cryptocurrencies can maintain their low value, it could lead to reduced energy consumption and a drop in the price of video cards, which are used for mining. Energy and video cards are tangible assets that people can actually use, whereas most cryptocurrencies are purely speculative.