In recent weeks, the value of most
cryptocurrencies has fallen, wiping out billions of dollars in wealth.
And instead of mostly harming cryptocurrency enthusiasts, as
previous crashes have, the impact was felt widely.
Cryptocurrency's popularity skyrocketed during the pandemic,
attracting numerous celebrity endorsements and being included in more asset
portfolios.
Nonfungible tokens (NFTs), a type of cryptocurrency and
blockchain-based technology, suddenly appear in everything from late-night talk
shows to Matt Damon ads. Athletes like Odell Beckham Jr. and mayors such as
Eric Adams (D) of New York have even elected to have their salaries converted
to bitcoin.
While banks and brokers used to dismiss cryptocurrencies, an increasing
number of institutions are now providing purchasing and custody services.
Several start-ups, notably Robinhood, have risen to prominence due to the
growth, and several blockchain-based companies have even applied for national
banking licenses.
That has made the recent price dips, in which both bitcoin and
ethereum have dropped more than 40% from their highs, all the more harmful.
Many investors in the red are prepared for huge tax bills on wins
they may no longer have as tax season approaches.
"One of the most common fallacies about cryptocurrency is
that it is anonymous, therefore regulators have no way of knowing what you're
doing in the space." But that isn't the case, according to Shehan
Chandrasekera, a certified public accountant and the head of tax strategy at
CoinTracker.io, a cryptocurrency tax compliance software firm.
The same tax regulations apply to cryptocurrencies to stocks,
bonds, and other financial goods. Those who purchased cryptocurrencies with
dollars last year will not have to pay taxes on their purchases until they sell
or trade them. Investors who bought cryptocurrencies at a more excellent price
than they are now worth, according to Chandrasekera, can sell them directly and
deduct the loss from their taxes in 2022.
However, taxpayers who sold, mined, or exchanged cryptocurrencies
in 2021 may be required to pay capital gains taxes or income taxes. Taxpayers
who spent, re-invested, or lost a large portion of their net worth during the
recent crash may struggle to pay their payments, depending on when the
transactions occurred and state tax rates.
Calculating the total tax cost of bitcoin transactions might be
difficult, if not impossible, for new investors, according to Chandrasekera. He
claims that unlike stockbrokers or other trading platforms, most bitcoin
exchanges do not provide consumers with annual tax filing information for their
transactions. The frequency of peer-to-peer cryptocurrency transactions and
trades of one coin for another are additional tax issues peculiar to the
cryptocurrency industry.
"It's extremely tough to balance these transactions,
especially if you have many wallets," he said, referring to cryptocurrency
storage platforms.
Because of its volatility and sensitivity to fraud,
cryptocurrency's rapid popularity raises concerns about its long-term safety as
an asset.
Before last week's crash, the biggest cryptocurrencies have
experienced multiple sharp price fluctuations.
In the first month of 2018, Bitcoin lost more than half of its
value, and Ether, the second most traded cryptocurrency, lost more than 25% of
its value.
While both collapses had some external factors, such as
prospective U.S. regulation and overseas trading crackdowns, some of the
volatility can be attributed to the nature of the assets.
Unlike traditional currencies like the dollar or euro,
Cryptocurrencies are not widely accepted in exchange for goods or services.
David Sacco, a finance professor at the University of New Haven,
views them as a "speculative store of wealth" rather than a legitimate
currency.
In a phone interview with The Hill, he described cryptocurrency as
"essentially digital gold."
Investors accept that price oscillation is likely to remain a
feature of cryptocurrencies until more widespread adoption of cryptocurrency
applications, such as purchasing NFTs or using blockchain technology for
contracts.
"Volatility will exist until there is full adoption with
demonstrable use cases," said Eloisa Marchesoni, founder of crypto
consultancy Def.Ai Inc. "And we haven't seen anything like it yet."
Proponents of cryptocurrency are keen to point out that overall
growth patterns have been encouraging, albeit that fact is unlikely to comfort
the waves of investors who bought during the most recent rise.
More minor currencies have the potential to be considerably more
volatile. Many of the tens of thousands of tokens issued since bitcoin's debut
have soared apparently out of nowhere, only to crash a few days later.
These coins' sources of fluctuation maybe even less linked to
economic realities than the big ones. A single tweet from a well-known figure
in the crypto industry can skyrocket the value of a cryptocurrency.
After Tesla CEO Elon Musk posted a picture of his dog with the
caption "Floki Frunkpuppy," the Dogecoin spinoff Shiba in currency
soared 30% in October. He dropped the price by 20% after confirming he didn't
own any SHIB a few weeks later.
Several other so-called shitcoins have experienced comparable
price increases unrelated to substantive developments. When Rep. Brad Sherman
(D-Calif.) joked about hamstercoin during a hearing in December, the token's
value doubled before plummeting the next day as investors abandoned their
holdings.
Scammers and hackers have found cryptocurrency to be a profitable
market.
According to a January analysis by blockchain analytics firm
Chainalysis, scammers grabbed a record $14 billion in cryptocurrencies in 2021,
with much of the surge attributed to the increased use of decentralized finance
platforms.
Scams involving cryptocurrency have grown in popularity on social
media. "Social media is a tool for scammers in investment scams,
particularly those involving phony cryptocurrency investments — an area that
has witnessed a large rise in reports," the Federal Trade Commission said
in a statement about the record number of online scams reported last year.
Hackers have proved that the space is insecure. According to NBC
News, more than 20 hacks last year resulted in the theft of more than $10
million in virtual assets.
More than $30 million in assets were taken from digital wallets on
Crypto.com, the exchange market that recently purchased the naming rights to
the Los Angeles Lakers' arena.
The corporation has stated that it has implemented new security
measures due to the intrusion but has not specified those steps.
According to cryptocurrency enthusiasts, potential buyers should
conduct thorough research, diversify their holdings, and focus on time in the
market rather than immediate gains.
According to J.W. Verret, a financial law professor at George
Mason University and former House Financial Services Committee senior counsel,
price swings alone are not a basis to regulate the market.
"Supporting a sector is easier in a bull market." But
that doesn't mean a bear market necessitates regulatory intervention.
"It's a poor decision if someone buys a token just because of
a celebrity endorsement, but you can't regulate stupid decisions away."
Nonetheless, according to Verret, legislators and regulators
should provide more instructional tools for potential investors, set clear
expectations, and alter tax regulations to make cryptocurrency transactions
easier.
"There has been an exponential increase in retail interest,
increasing interest among youthful demographic, and increasing interest across
the political spectrum, and that will have political ramifications," he
said.
"We're already seeing interest in crypto from moderate Democrats." I believe that trend will continue and that the strongly anti-crypto voices will be drowned out."