The implosion of UST shook confidence in cryptocurrencies, and the threat of a market liquidity crisis wiped out private investment in crypto firms. The tax implications of liquidating crypto treasuries are another worry for investors. And finally, the volatility of cryptocurrencies is another concern. To begin your bitcoin trading journey, click the image below.
UST’s implosion rocked confidence in cryptocurrencies
The UST’s implosion has shattered investors’ confidence in cryptocurrencies, but the causes of this crisis are still unclear. Some analysts attribute the problem to the decline of trust in the underlying ecosystem, which underpins the algorithms that back stablecoins. When this trust is lost, the algorithms collapse, and the stablecoin falls into a death spiral.
A stablecoin like UST was seen as a low-risk investment by investors, who were attracted by its high yield. It was backed by the volatile LUNA token and offered a 20 percent yield. However, Alkemi Network Co-Founder Brian Mahoney criticized Terra’s rapid growth, who said it was fueled by greed, excessive leverage, and cash burn.
Market liquidity crisis threatens to wipe out private investments in crypto firms.
There are a few reasons why the market liquidity crisis threatens to wipe out private investments in crypto firms. First, the cryptocurrency community is not regulated and doesn’t have a backstop to provide liquidity. For example, cryptocurrency lending firms have more leverage ratios than they report. This creates a domino effect as other businesses start to miss payments.
While the crypto market’s recent plunge echoes the subprime market crash 15 years ago, the crypto crash isn’t likely to result in a global economic meltdown. While $1.3 trillion in losses is a large number, it’s still a tiny fraction of the U.S. economy and is far smaller than the effects of the housing bubble. Further, Bitcoin mining is environmentally damaging and economically trivial compared to home-building, which contributed to the Great Recession.
Tax implications of liquidation of crypto treasuries
One of the risks of crypto treasuries is the possibility of liquidation. A company may be liquidated for various reasons, such as failing to meet margin requirements or other reasons. In either case, the loss of collateralized assets on the balance sheet can negatively impact the company’s GAAP net income. To minimize the risk of liquidation, spot traders should be cautious when setting margin calls and keep a fiat buffer in case the market plunges.
Cryptocurrency is a digital asset that uses distributed ledger technology and cryptography to validate transactions. For federal tax purposes, virtual currency is treated like property. As such, the general tax principles for transferring property will apply. These principles are particularly relevant to individuals holding cryptocurrency as a capital asset but not engaged in selling it. A Chief Counsel Advice (CCA) 202124008PDF explains how to treat crypto treasury assets in the context of federal tax laws.
Volatility of cryptocurrencies
This study has examined the relationship between liquidity and returns of five prominent capitalization cryptocurrencies. It found that the higher the volatility, the higher the returns. Although investors view liquidity as a risk, they usually look for a higher return to compensate for the trouble. Bitcoin has the lowest correlation between liquidity and returns, but it remains the most popular cryptocurrency.
This volatility is due to several factors. The first is that bitcoin’s price has gone up and down a lot in recent months. Elon Musk’s tweets about the cost of bitcoin contributed to the market’s volatility. Another factor is China cracking down on crypto transactions. Moreover, investors are taking on debt to finance futures. Eventually, this can lead to further price drops.
According to a survey by the Center for American Progress, four-in-ten adult men and nearly a fifth of women have invested in or used cryptocurrency. However, as people age, their likelihood of investing decreases. In addition, people of Asian descent are much more likely than white or Hispanic Americans to invest in cryptocurrency.
As interest in crypto assets continues to grow, congressional and federal regulators have increased efforts to crack down on illegal activities and protect investors. In recent hearings, legislators and industry leaders have used talking points implying that stronger regulation would prevent financial inclusion. However, these talking points have not been verified.