Just as the stock market ebbs and flows with opportunities, the same can be said about the world of cryptocurrency. There’s no doubt that significant price swings open up opportunities for traders to earn a significant amount of profit. However, investors might not be the biggest fans of volatility as it can often result in panic selling. Despite this persistent fluctuation, it’s possible to take advantage of varying prices without trying to overly predict market prices.
Our cryptocurrency CPA makes it easy to capitalize on your returns while reducing the risks of loss.
Causes of Volatility
We all know that the crypto markets can be volatile, but what are the contributing factors to the spikes and drops in value? Even a matter of minutes can be the difference between profit and loss. This is by design as the markets themselves are highly speculative which is both good and bad depending on the trade and the investor’s overall point of view.
Supply & Demand
The supply of cryptocurrency changes as more people purchase them. In addition, the mining process produces new coins that impact this balance. For example, when more people want to purchase Ethereum, the coins increase in value as there is a limited coin supply. When there is an excess supply, the price of the coins lessens.
Hype & Speculation
Our cryptocurrency CPAs also know that speculation can factor into volatility. When a new cryptocurrency hits the market, it causes people to become excited as they hear about it. Many rush into buying and selling the new coin which increases the prices to sometimes unsustainable levels. Eventually, the speculation and hype dies down and prices become more normalized.
Production Costs
There are two essential factors that determine token production costs: the network’s power consumption and its hashrate. As competition for mining a particular cryptocurrency increases, the more difficult it is to mine and the less profitable it is.
Competition
As more and more cryptocurrencies hit the market, it can create too much competition and drive down prices. This is even true for more established coins such as Bitcoin and Ethereum.
Legal Requirements & Regulations
Another contributing factor to cryptocurrency volatility is various governing parties that are closely monitoring cryptocurrencies. As more legislation and regulation comes from these governing parties there is an increased risk to the impact it may have on the price of crypto assets.
Wash Sales
One other thing to keep in mind is the IRS wash sale rule and its relation to cryptocurrency. This IRS guideline outlines when and how investors can buy and sell securities, and tax-loss harvesting refers to selling assets at a capital loss to help counter capital gains. As the IRS deems crypto as property rather than a security, you can sell the coins you own at a loss and repurchase them without needing to abide by a waiting period.
Guidance From a Cryptocurrency CPA
With so many rules, regulations and technicalities surrounding cryptocurrency on top of an already volatile market, it’s best to reach out to a professional who can help. Our team at Founder’s CPA has helped countless individuals and businesses navigate these topics. Call us today to take advantage of our free consultations.
