Cryptocurrency markets were in the red for most of this week due to a variety of developments that ranged from China intensifying its crackdown on cryptocurrencies to Congressional testimony by the heads of the SEC and CFTC.
The news was mostly negative, and crypto markets reacted accordingly by crashing to $281 billion, a decline of 37.8% from their prices on February 4. Digital currencies have since recovered and have a total valuation of $422 billion at 17:37 UTC.
Among the top 10 most-traded cryptocurrencies, Ripple counterpart Stellar shed the most value, falling by 13.6% since Sunday. Chinese cryptocurrency NEO was the week’s best performer. But that’s not saying much since it rose only 5.7%.
Here’s a brief recap of stories that affected or are likely to affect bitcoin’s price.
Regulations Take Center Stage
It was a week of regulations for bitcoin and other cryptocurrencies. At the beginning of this week, news reports claimed that China was planning to ban its citizens from trading on international exchanges.
Then came the Congressional hearings, during which the heads of the SEC and CFTC reiterated their stance of policing unsavory elements within the cryptocurrency ecosystem. (See also: SEC Chair Testified About Cryptocurrency Regulations Before Congress).
SEC Chairman Jay Clayton set off a tizzy of analyses by claiming that all ICOs were securities. This statement implies that all ICOs are within the agency’s purview. Except, that may not be the case. There is also the question of what this means for ethereum. (See also: Is Ethereum A Security? SEC Chief Sows Discord.)
The tax man made his presence felt towards the end of the week as India began knocking on the doors of crypto investors for taxes. Another report claimed that Japanese crypto investors are moving out of the country because they may end up paying as much as 55% of their profit as capital gains tax.
Meanwhile, the IRS is busy developing a crack team of agents and sophisticated software to detect tax evaders. Cryptocurrency exchange Coinbase may be caught in the IRS’ crosshairs as it goes after crypto investors. (See also: Coinbase Issues 1099s: Reminds Users To Pay Taxes On Bitcoin Gains.)
Is There A Correlation Between The Cryptocurrency And Equity Markets?
The simultaneous decline in equity and cryptocurrency markets has prompted a search for correlation among both by analysts. Deutsche Bank analysts posited that an inverse correlation exists between the volatility index and bitcoin prices.
Morgan Stanley analysts found that the 30-day trailing correlation between the stock market and bitcoin prices was 0.3. A score of 1 represents perfect correlation. That is not bad when you consider that bitcoin was considered an asset class that was unrelated to other categories.
Finally, Data Trek, a research consultancy, correlated 90-day returns data for bitcoin and equities and found that a correlation ratio that was greater than 0.3. “Over the near term (the rest of this month), a volatile and declining U.S. equity market will be bad for bitcoin, but higher S&P levels may not help much,” the firm wrote.
Goldman Sachs Predicts Shakeout And Institutional Money Enters Bitcoin
Analysts at Goldman Sachs predicted that valuations for most cryptocurrencies will go down to zero and that they will not witness current highs again. The firm did not provide a timeline for this occurrence.
But that bit of bad news should be tempered with the good news about institutional money slowly making its way into the ecosystem. Billionaire investor Mike Novogratz’s crypto merchant bank is reported to have raised $250 million. But don’t expect institutional investors to bet long on bitcoin’s future prospects. Several are shorting it and betting on Ripple’s XRP future.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.