The price of popular cryptocurrencies such as bitcoin and ethereum plummeted on Friday after Chinese authorities stepped up their crackdown, effectively declaring crypto illegal.
Financial advisors say that while the government action is important, it does not always indicate that investors should go. But, as they pointed out, it’s yet another reminder that crypto holdings are prone to huge price swings.
“This should be a recognition that it’s a volatile asset with ups and downs that go hand in hand,” he said.
Depending on the Democrats’ ultimate compromise on federal tax legislation, this unpredictability provides tax-planning options that may only be accessible for a few more months, according to advisers.
As of 3 p.m. ET Friday afternoon, bitcoin values had dropped 6% to around $42,000. Ether, the second-largest digital currency, has dropped more than 8% to $2,890.
After declaring all crypto-related activity unlawful, the People’s Bank of China alarmed investors.
Trading services and international exchanges are two examples of these operations. It’s the latest move in a broader assault on digital currencies in the country.
Advisors say that banning bitcoin and other cryptocurrencies could be concerning for existing and potential investors because the government is limiting the pool of buyers to a major section of the world’s population. They predict that new rules will be imposed by other governments as well.
However, these factors may not have a significant impact on long-term prices. According to experts, a day-to-day drop in crypto’s price, which may seem big at the moment, is likely just part of a longer-term course correction toward some average price.
“Will government regulation cause significant changes in the cryptocurrency market?” Yes, according to Wayne Wilbanks, managing principle and chief investment officer at Norfolk, Virginia-based Wilbanks Smith & Thomas Asset Management. “Will it obviate the need for crypto? No.
He continued, “I don’t think China’s regulation, or even US rules, make that much of a difference in the long run.”
Bitcoin, for example, is still up about 40% year to date despite Friday’s drop. (It’s still down from its April peak of $63,000.)
Volatility has been a signature of cryptocurrencies to date. This year, prices have swung wildly after tweets from Tesla co-founder and crypto enthusiast Elon Musk, for example.
Due to the risk, advisors often advise investors to allocate a modest portion of their assets (whatever they’d be willing to lose altogether).
Benefit from the tax system
According to Jeffrey Levine, CFP, accountant and chief planning officer of Buckingham Wealth Partners in Long Island, New York, investors can benefit from recent volatility.
Investors in stocks, bitcoin, and other assets can “harvest” investment losses for a tax gain. Essentially, they can sell a losing investment (such as bitcoin) and use the proceeds to offset the gain on another winning investment in their portfolio.
This “tax-loss harvesting” lowers (or eliminates) the capital-gains tax owing on the appreciated value of a sold investment.
Crypto investors, unlike stock investors, can easily reinvest in the same or a similar digital currency if they sell out. As a result, they may be eligible for the aforementioned tax benefit as well as a portfolio benefit if the volatile asset’s price recovers quickly.
As part of a campaign to change the tax law, House Democrats recommended abolishing this crypto loophole after this year.