The cryptocurrency markets are currently in a bear market. There’s no sugarcoating the truth that the crypto markets have had a rough year.
However, there is a silver lining to bitcoin that tax-savvy investors can take advantage of. Although bear markets can be distressing for investors, they can also be viewed as excellent opportunities to buy in at reduced prices.
What is a Bear Market?
In simple terms, a bear market occurs when the prices of a sector’s or multiple sectors’ prime assets continue to fall for an extended period. Bear markets, in both traditional and cryptocurrency markets; occur when the market as a whole falls by at least 20% from recent highs.
Due to the significant price correlation, small-cap and mid-cap assets suffer bearish price losses because of the drop in the price of the top assets. During a bear market, supply exceeds demand, confidence is low, and prices fall.
For novice or beginning traders, bear markets can be challenging. Furthermore, predicting the end of a bear market or finding the exact price bottom to ‘buy the dip’ is challenging.
Are Bears Leading the Market?
At press time, the global crypto market value had dropped over 60% from its all-time high of $3 trillion to $1.25 trillion. Bitcoin (BTC), the most valuable cryptocurrency by market capitalization, was down 56% from its all-time high in November of last year.
While the top altcoin, ether (ETH), was down 58 percent from its all-time high of $4,847.
As a result, it appeared that cryptocurrency investors were experiencing a full-fledged bear market. Furthermore, the range-bound behavior of the bigger crypto market size and the prices of most leading coins supported bear market fears.
Notably, the worldwide crypto market was losing double-digit percentages, with BTC temporarily falling under $25,000 on 12 May, the lowest level since July 2021.
Many investors are reasonably concerned about the pessimistic market attitude, decreasing social volumes, and the collapse of the Terra ecosystem. This is not to say that you won’t be able to function in a bear market. After all, the cryptocurrency market never sleeps.
Related: Can Terra LUNA Price Make A Return?
Why Invest in Bear Markets?
Bear markets are obviously frightening for newbies and even experienced market participants, as no one enjoys seeing their portfolios lose value. Bear markets, on the other hand, might present opportunities to invest for the long term while assets are trading at a discount.
Newcomers usually enter the market because of social excitement or FOMO (fear of missing out); however, bear markets are actually great times for investors to enter because most assets trade at a discount. Bear markets also present a fantastic chance for shorting assets since prices drop dramatically.
How to Invest in Crypto Bear Market?
While there are no fast fixes or solutions for surviving a crypto bear market, analysts and traders frequently propose certain tactics. Portfolio diversification, for example, can help you lower investing risk by spreading your money over a variety of assets during a weak market.
However, thinking long-term will always assist you in navigating through bear markets. Many inexperienced investors make the error of departing too soon due to short-term losses, which is a risky method to deal with adverse market movements.
Finally, in a market as volatile as the crypto industry, aiming to constantly catch the bottom may be fruitless. A bear market can sometimes end as soon as the bottom is reached. When assets begin to rebound, one may wind up investing at a higher price in an attempt to catch the bottom or buy the final dip.
Contrarily, bear markets are undoubtedly slow and uncertain, and they are commonly influenced by a wide range of external factors like economic expansion, investor psychology, and big news or events throughout the world.
The Wash-sale Loophole and Tax Loss Harvesting
Assume an investor bought $50,000 worth of bitcoin (BTC) and ether (ETH) in their crypto account at a price of $55,000 per coin for bitcoin and $3,500 per coin for ether at the time of purchase.
If the money were split evenly between bitcoin and ether at the time of purchase, the investor would now hold 0.45 BTC and 7.14 ETH.
The investor has kept the coins throughout the bear market, and now holds 0.45 BTC and 7.14 ETH. However, if bitcoin is trading at $29,000 and ether is trading at $1,900, the current value of the stake is $26,616, representing a $23,384 unrealized loss.
So, if you bought Tesla (TSLA) stock for $1,200 and sold it for $775 this year, you couldn’t repurchase Tesla stock for another 30 days to claim the $425 loss. However, this has not (yet) been incorporated into the Bitcoin tax code.
Therefore, if the investor still wants to own bitcoin and ether after selling the investment, he simply buys an equal amount of each immediately after selling the position. In contrast to traditional financial securities, this does not result in a wash sale.
Because crypto is extremely volatile, and its value might change dramatically in 30 days, the lack of a wash-sale restriction gives the clever investor a distinct edge.
Being able to maintain a position despite experiencing a loss is a terrific strategy to improve a financial plan’s long-term returns and tax efficiency.
While the market will undoubtedly oscillate between a sell and an urgent buy, the investor in our case will be able to keep the majority of his 0.45 BTC and 7.14 ETH stake (minus market movement and transaction costs).
Crypto Tax Losses can Offset More than Crypto Gains
Losses realized in a crypto position can be used to offset tax liability on any gain earned; they are not limited to crypto gains.
It is important to note that for many accountants and tax preparers, taxation and crypto are uncharted territories. Even if the laws are clear, it is critical to keep track of these transactions.
If your crypto custodian does not issue 1099, or if you self-custody your crypto, keeping an account of your trades by hand or using crypto tax software is necessary.
While we all desire that cryptocurrency’s value will continue to climb indefinitely, this is not the case.
Understanding the tax rules that govern crypto investments can present a unique opportunity during a downward market and can aid investors willing to put in the effort to reduce their taxable loads.
While there is no certainty that this regulation will not change in the future, it is a unique aspect of crypto now and should be included in financial planning.