Falling stock prices and concerns about rising interest rates were rattling cryptocurrencies, analysts said Monday.
Bitcoin, which has shed about a quarter of its value in January alone, was down slightly $35,314 at last check, while Ether was off 5.4% to $2,310. Dogecoin was up the rise, climbing 2.3% to $0.131782.
“The damage comes amidst a wider sell-off of risk assets in traditional markets,” said James Edwards, cryptocurrency specialist at Finder, “spurred by repeated signals from the Federal Reserve that they are planning to combat inflation by rising interest rates several times over the course of 2022.”
Don’t fight the Fed
Edwards said that the increasing correlation between cryptocurrencies and traditional markets “is a symptom that investors will have to learn to live with.”
“Last year saw unprecedented inflows of institutional investment into bitcoin, as firms looked for more exotic investment avenues to hedge against the risk of inflation,” he said. “With the Fed making moves to counter rising inflation, it’s understandable that these same institutions may now want to do the reverse, moving capital away from Bitcoin and back into less-risky assets.”
Winston Ma, Managing Partner of CloudTree Ventures, Author of The Digital War – How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace”, got right to the point: Don’t fight the Fed.
“When the yield curve is rising, don’t fight the Fed; when digital dollar is coming, don’t fight the Fed,” Ma said. “In January we saw a busy Fed not only adjusting its monetary policy towards gradual tightening, but also releasing a long-awaited report on the potential launch of US central bank digital currency, or the digital dollar.”
Whereas prospect of rate hiking has sent the broad crypto market tumbling, Ma said the “potential digital dollar probably will put regulatory pressure especially on stablecoins like Tether and Circle.”
“With digital dollar coming, stablecoins for US dollar may have to subject themselves to more stringent regulations to coexist, considering US Treasurer Yellen and US SEC Chairman Gensler specially have called for more regulations of stablecoins recently,” Ma said.
Crypto Enthusiasts Heading to Puerto Rico
Meanwhile, David Lesperance, managing partner of immigration and tax adviser at Lesperance & Associates, said that “there is a significant uptick in American Crypto enthusiasts moving to Puerto Rico to take advantage of capital gains tax advantages contained in Act 60 of the PR tax legislation.”
“Unfortunately after the initial honeymoon period, many found the requirement that the taxpayer be physically present in Puerto Rico for a minimum of 6 months was too onerous,” he said. “Specifically while they may have enjoyed the company of fellow hedgies, their family members were finding the transition from NYC, Boston, or Connecticut extremely difficult.”
As a result, Lesperance said, some decided to divorce the strategy by either renouncing US citizenship or returning to the US.
“Those who instead chose to ‘cheat’ and lie about their physical presence, are now the target of a special IRS task force which is auditing ALL Act. 60 participants., he said. “The buzz from my clients is that many fund managers are busy selling their houses and apartments to naive Crypto types.”
Only time will tell if the marriage between crypto and Puerto Rico has legs, Lesperance said.