We may look back on this time as the “Crypto Tax Crisis of 2018,” as thanks to tax liabilities we’re witnessing the most concentrated period of net fiat outflows that the cryptoasset ecosystem has experienced in its short life.
These large flows have a first and second order effect. First, they can severely impact asset prices in illiquid markets, with large sells single handedly crashing prices in thin order books. Secondly, and more perniciously, a strong enough slump induced by concentrated selling in an illiquid crypto market can set off reflexivity beyond what we normally experience in the traditional capital markets.
Reflexivity is most commonly thought of as an internal feedback loop, where investor perception becomes a self-reinforcing reality. As a result, asset prices can be fed solely by the signals of other investors, or variables endogenous to the process of investing, as opposed to exogenous variables that are more representative of an asset’s fundamentals.
We hypothesize that crypto’s heightened reflexivity is driven by uncertainty and confusion around the early-stage technology, virality of communication mechanisms, lack of standardized valuation frameworks, regulatory paranoia, and majority retail participation. All of these characteristics are amplified by the liquid nature of this emerging asset class, which creates sub-second informational signals that violently feed back on themselves.
Below we explore potential tax outflows, outline an approach to quantify the reflexivity of cryptoassets, and discuss the potential for future research to track the evolution of this phenomenon.
Just several month ago, Bitcoin confidently marched across the globe, reaching $20,000 mark with 800 billion US dollars capitalization. Shortly thereafter, we witnessed massive market collapse that resulted in significant losses. Bitcoin lost about 66% of its market pvalue, while market capitalization went down to 260 billion USD. In this article, my main goal is to determine possible bitcoin behavior for 2018, but before doing that I need to look back and spot all major reasons behind Bitcoin crash.