After a tumultuous week, crypto markets got another shock on Thursday. Minutes after a Bloomberg article outlining the Biden administration’s plans for raising capital gains taxes on earnings over 1 million, some vague but alarmist messages started to circulate on twitter and spread through trading desks saying that Treasury Secretary Yellen was eying the idea of taxing crypto trading at 80%. The tweet in question was simply attributed to “sources”, but had no official substance behind it, much like the tweet that was circulated in the middle of the night this past Saturday implying that the Treasury was going to sanction major financial institutions for money laundering using crypto. That first tweet kicked off the first sharp part of the current correction. This second tweet has added fuel to the fire and started a 10% slide overnight.

For traders who have been in crypto for a long time, these types of moves on rumors is nothing new, and there is a healthy degree of skepticism with which any seasoned crypto trader views these types of developments. Unlike US equities, where the SEC has tight regulations regarding the dissemination of news and other information, crypto is more of a caveat emptor market. Many speculate that alarmist news is purposefully circulated by whales or large long-term maximalists who wish to acquire bigger positions at a discount. They can put rumors out and aggressively sell a small part of their holdings in an attempt to flush out newer, less experienced, or over leveraged investors, causing a sharp dip in prices which they can then use to accumulate ever larger positions.

Price action in times like this is a stark reminder that, even though volatility had been coming in and prices had been stabilizing for the last two months, crypto markets still carry risk, and they don’t always just go straight up. Also, the more leverage through futures and perpetual swaps that accumulates in the market, the more susceptible the market becomes to quick and severe corrections. It remains to be seen whether the rumors that have been circulating have any basis in fact, but I believe that they probably do not. However, it is very difficult to anticipate the exact impact of rumors like these, to know where support will come in with strength and authority, or over what time frame the market will slowly forget about the rumors assuming there is no follow up.

For many traders who are new to crypto, this might be the first cycle of fear, uncertainty, doubt, and price correction that they have seen. Many will sell their holdings, taking profits or losses, and walk away. Some will use the dip to accumulate. Either way, when the dust settles, everyone will have a little more experience and have a little more wisdom about how to react whenever the next cycle of FUD hits the news wire.

CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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