Detail of the statue of Satoshi Nakamoto, the pseudonym used by the inventor of bitcoin in Budapest, Hungary.
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The price of popular cryptocurrencies like bitcoin and ethereum fell on Friday after Chinese authorities stepped up the crackdown, essentially banning crypto.
Government intervention, while important, does not mean investors should run for the hills, financial advisers say. But it’s another reminder that crypto holdings are subject to wild price swings, he said.
“I wouldn’t call it the end of the world,” said Leon Labrecque, accountant and chartered financial planner at Sequoia Financial Group, based in Akron, Ohio. “It’s just a wake-up call.”
“You have to recognize that this is a volatile asset and all the ups and downs go hand in hand,” he said.
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This volatility opens up tax planning opportunities that could be available for a few more months, the advisers said, based on the Democrats’ final agreement on federal tax law.
By 3 p.m. ET on Friday, the price of bitcoin had fallen 6% to around $ 42,000. Ether, the second largest digital currency, fell more than 8% to almost $ 2,890.
Investors are stunned after the People’s Bank of China declared all crypto-related activities illegal. For example, these activities include trading services and foreign exchange transactions. This is the latest step in a nationwide crackdown on digital currencies.
The notice said the ban on bitcoin and other cryptocurrencies could be of concern to current and potential investors, as the government restricts the pool of buyers from a significant portion of the world’s population. And other governments will also be implementing additional rules, he said.
But for long-term prices, it may not make much of a difference. The daily drop in the cost of crypto, which may seem significant at the time, could be part of a long-term correction of course towards an average value, advisers said.
“Will government regulations cause major volatility in crypto?” Yes, ”said Wayne Wilbanks, Managing Director and Chief Investment Officer at Wilbanks Smith & Thomas Asset Management in Norfolk, Virginia. “Will this make crypto obsolete?” No.
“I don’t think Chinese regulations, or even US regulations, make a big difference in the long run,” he said.
Bitcoin, for example, is still up around 40% despite Friday’s drop. (However, it remains close to the April high of $ 63,000.)
Volatility has been a signature of cryptocurrencies to date. For example, prices have skyrocketed this year following a tweet from Tesla co-founder and crypto enthusiast Elon Musk.
Advisors generally advise investors to allocate a small portion of their portfolio (which they would be entitled to lose) because of risk.
According to Jeffrey Levine, accountant and planning director at Buckingham Wealth Partners in Long Island, New York, investors can use recent volatility in their favor.
Stock, crypto, and other investors are able to “reap” investment losses for tax benefits. Basically, they can sell a losing investment (eg, bitcoin) and use the loss to wipe out the gains from a winning investment elsewhere in their portfolio.
This “harvest of tax losses” reduces (or eliminates) the capital gains tax, which is due on the appreciable value of the investment sold.
However, unlike stock market investors, what crypto investors sell can quickly redeem in the same digital currency or a similar currency. As a result, they can benefit from the tax advantage mentioned above, as well as a portfolio advantage if volatile assets regain value too soon.
House Democrats have offered to close this crypto loophole later this year as part of a campaign to reform the tax code.