The COVID-19 outbreak has wreaked havoc across the global economy. With stocks swooning and job losses mounting, it's a difficult time for traders and investors in any asset class. The crypto market hasn't been immune to these dynamics as cryptocurrency prices fall and crypto projects struggle to raise capital.
Let's take a look at how the crisis is affecting crypto markets and what it means for your portfolio.
Flight to Safety
Investors have been selling risky assets in favor of safe-haven assets over the past month, and the crypto market hasn't been immune to these declines. The price of Bitcoin plummeted from more than $9,000 on March 7 to nearly $4,000 by March 13 before finding a trading range between $6,000 and $7,000 by the end of the month.
The lack of appetite for risky assets isn't limited to traders and investors in the stock market, either. While initial coin offerings, or ICOs, have been on the decline for some time, the COVID-19 crisis brought them to a virtual standstill. Venture capitalists have also cut their investments into startups, including many crypto projects.
The only bright spot has been stablecoins, which are backed by fiat currency or other non-crypto assets. For instance, the strength of the U.S. dollar has led to strong demand for USD Coin and other U.S. dollar-based stablecoins. Many investors are turning to these coins as a source of crypto stability and liquidity in volatile times.
Crypto Losses & Tax Season
Many crypto investors have experienced significant losses since the COVID-19 outbreak — if you’re one of them, don't let losses go to waste! Tax loss harvesting is a strategy whereby you can realize losses in crypto positions and use them to offset other capital gains or even some of your regular income.
Unlike equities, crypto investors may not have to worry about the Wash Sale Rule that says you cannot repurchase the same assets within a certain period of time after selling it. You can sell and immediately replace crypto assets to realize the loss in the current tax period without penalty, helping to offset capital gains or other income.
ZenLedger simplifies this process by automatically analyzing your crypto positions for tax loss harvesting opportunities. After uploading your transactions, the platform creates a Google Sheet that opens in a new browser tab with potential losses to harvest organized by both FIFO and LIFO accounting methods.
While the tax deadline has been pushed back to July 15, 2020, crypto traders and investors should ensure that they're accurately recording their transactions right now. The IRS will still impose fines and penalties on those that are underreporting their crypto gains from 2019 and it’s important to keep everything organized to avoid problems.
The COVID-19 crisis has caused a flight to safety that has depressed cryptocurrency prices. As with the equity markets, some investors are treating the decline as an opportunity to build up their long-term positions at a lower cost basis. Buying at lower prices can help decrease the cost basis for their overall portfolio and potentially improve long-term profits.
There's also an argument that the COVID-19 crisis could spark higher crypto demand from developing countries. Hyperinflation has been a well-known driver of crypto adoption in the past, as consumers look for easy ways to protect their capital. And it's easier to purchase and store many cryptocurrencies than gold or U.S. dollars.
In the U.S., the government's $2 trillion economic relief package has similarly bolstered the case for cryptocurrencies. Many cryptocurrencies, such as Bitcoin, may not suffer from inflation in the same way as fiat currencies, since the supply is finite, which could make it a compelling store of value during an inflationary environment.
Scammers Turn to Crypto
It's no secret that scammers have turned to cryptocurrencies as a way to receive payments that are harder to trace. Unfortunately, unsavory scammers have used the COVID-19 crisis to launch a range of different scams, ranging from stealing donations to demanding ransoms. Anyone involved in crypto should be wary of these scams.
The most insidious scammers have impersonated the WHO's COVID-19 Solidarity Response Fund to steal crypto "donations". They send emails that appear to be from the World Health Organizations (WHO) asking for donations in Bitcoin. For those interested, the real link is www.covid19responsefund.org.
The scammers impersonating the @WHO COVID-19 Solidarity Response Fund are evolving. First samples seen on 16 March and have put a bit more spit and polish on the 18 March run. Please donate to the real fund here: https://t.co/MfggnADyKF pic.twitter.com/FVwbbSmN4e
— Chester Wisniewski (@chetwisniewski) March 19, 2020
Other scammers have created a fake COVID-19 app for Android devices — and potentially others — that pretends to help track the spread of the virus around the world. In reality, it's ransomware that demands a payment of $100 in Bitcoin in exchange for a password to unlock the device.
The Bottom Line
The COVID-19 crisis has adversely impacted nearly every risky asset, including the crypto market. In addition to falling prices, many crypto projects could have challenges raising capital through ICOs or venture rounds. Scammers are also taking advantage of the opportunity to defraud others.
Despite these negative trends, there's an opportunity for crypto traders and investors to harvest their losses and lower their long-term cost basis in today's environment. The combination of potentially higher demand in developing countries and the staggering amount of new U.S. debt could accelerate adoption.