After notching jaw-dropping returns in 2020, Bitcoin is scuffling to start 2021, but that may be more a case of seasonality than weak underlying fundamentals. The largest digital currency could be in stronger form several months from now.
Some crypto market experts believe one reason Bitcoin is slumping to start the new year is tax selling, Many investors that made profits on Bitcoin waited until January to sell to avoid paying taxes on those gains for the 2020 tax year.
By selling this month, those investors won’t have to pay Uncle Sam his taxes until they file for the 2021 tax year, which will be sometime in early 2022.
“According to Delphi Digital’s January bitcoin outlook report, one of the biggest reasons for the drop is that ’those [investors and traders] who realized significant gains trading various crypto assets last year will likely have to sell at least a portion of their holdings to cover expected tax liabilities,” reports Muyao Shen for CoinDesk.
Bitcoin Can Bounce Back
Recently, some big name investors signaled their interest in blockchain technology and cryptocurrencies. That comes against a backdrop of potentially favorable seasonality. Recently, the Bitcoin Dominance Index has been rising, confirming the dominant perch of the cryptocurrency.
There is significant room for growth in the cryptocurrency universe. Recent data suggest a small amount of American investors own any digital currencies and after Bitcoin, the number of crypto owners dwindles precipitously.
“It’s difficult to pinpoint exactly how much selling pressure can be expected, and different jurisdictions treat capital gains more favorably than others,” Kevin Kelly, co-founder and head of global macro at Delphi Digital, said. “But bitcoin alone added more than $400 billion to its total market value last year. A decent portion of those returns accrued to speculators and traders who may have already realized some gains or rolled profits into other corners of the crypto market, thus triggering taxable events.”
Investors wondering when favorable Bitcoin seasonality kicks in don’t have to wait long. This time period tends to arrive late in tax season when tax selling abates.
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