Bitcoin Dips Below Support Level as US Tax Return Deadline Looms
Bitcoin (BTC) has dipped below the critical price support to hit a one-month low price just as the U.S. tax returns deadline draws to a close.
The world’s largest cryptocurrency by market value hit as low as $38,577 during the Asian hours according to CoinDesk Data. The move lower came after BTC failed to take out the key resistance level at $40,000 over the weekend. The cryptocurrency is currently changing hands near $38,500. The latest decline means the cryptocurrency has lost over 17% since testing waters above $48,000 three weeks ago.
The weakness in the cryptocurrency market also appears to have spooked altcoin investors, with Ethereum’s ether token and meme-based dogecoin losing over 5% each on a 24-hour basis.
The price weakness appears to be a result of tax-related sell-offs. For U.S. investors, Monday, April 18, 2022, is the deadline to file/submit 2021 tax returns or an extension to file. Similarly last year, crypto market players sold digital assets during the tax returns season, running between Jan. 1 and April 15.
According to Jeff Anderson, CIO at the quantitative trading firm and liquidity provider Folkvang Trading, “Tax-related selling has played a role in recent weeks. However, it’s difficult to say exactly how much of the weakness has been due to the impending tax deadline.”
The yield on the 10-year Treasury note, which influences everything from mortgage rates to corporate borrowing costs, has climbed as traders have become more confident that inflation will remain elevated in the coming months. The rise in yields pressured stocks early on Monday and was a key driver of last week’s rout in technology shares. The U.S. 10-year Treasury yield rose to a 2.88% early on Monday, the highest level since December 2018, per data provided by charting platform TradingView.
According to George Liu, head of derivatives at Babel Finance, “The tax issue has been known and anticipated in the markets already, so we don’t see that as a decisive factor for the current price dip,” Liu said. “Basically, the short-term correlation between bitcoin and U.S. stocks has reached a new peak.”
The rolling 90-day correlation between bitcoin and the Nasdaq Composite recently broke above 0.6, according to institutional bitcoin broker NYDIG.
Looking further back, the correlation between bitcoin and U.S. stocks has been strengthening since early 2020 as institutional investors have increased their allocations to cryptocurrency amid a flight to digital assets during the Covid-19 pandemic.
The recent move higher in yields appears to have spooked some bitcoin investors, who may be concerned that rising rates could lead to a rotation out of growth assets such as cryptocurrency and into value stocks.
Looking at the blockchain data shows that the bulk of sell-offs is likely coming from short-term crypto traders with significant bitcoin holdings. Derivative forex traders seem to be assuming positions to profit off an extended decline in bitcoin price, as evidenced by the rising level put-call skews, which measure the cost of puts relative to calls.
The US tax return deadline is finally here and some bitcoin investors may just be selling off their holdings to pay their taxes. The IRS has been cracking down on cryptocurrency holders who have not been paying their taxes, and this could be leading to some selling pressure.