Bitcoin struggles for momentum after latest sell-off

The Internal Revenue Service in the US has said it needs more authority from Congress to regulate the cryptocurrency industry. Photo: Getty Images

Cryptocurrencies were broadly higher on Wednesday morning and are slowly recovering losses from the latest sell-off amid a volatile start to the month.

This comes as El Salvador became the first country to adopt bitcoin as legal tender. Bitcoin (BTC-USD) was up almost 5% and was trading at $34,398 (£24,272), edging closer to $40,000 but still far from its all-time high of $63,000.

“Although, on the macro front, this is still a very small country that isn’t going to have any profound influence, the fact that bitcoin has become a legal currency in El Salvador is certainly a moment of celebration,” Naeem Aslam, chief market analyst at Ava Trade, had earlier noted.

Nigel Green, CEO of financial advisory organisation deVere Group, meanwhile said he expects other developing countries to follow “because low-income countries have long suffered because their currencies are weak and extremely vulnerable to market changes and that triggers rampant inflation.”

On Tuesday, bitcoin prices had plunged after former US president Donald Trump called it a “scam” and the weekend had been turbulent for cryptos following reports that Chinese social media site Weibo suspended “key opinion leaders”, reigniting fears of a further crackdown in the country.

It is also worth noting that top US cryptocurrency exchange platform Coinbase (COIN), which went public back in April, fell 4.66% to end Tuesday at its lowest close yet and down 35.48% from its peak. At the time of writing, it was up 0.2% in pre-market trading.

Michael Brown, senior market analyst at Caxton, noted that “it is not quite as tough to be bearish on bitcoin at the moment”.

“Bitcoin has now broken to the downside of a triangle formation made over the last couple of weeks; breaks of such formations are usually significant, and tend to guide direction for a while,” he explained, adding that the formation gives a measured target of around $22,000. 

“Whether or not that comes to fruition, the bears clearly have near-term control, and a break of $30,000 would certainly make things very interesting indeed.”

Ethereum (ETH-USD) ticked up 0.1% to trade at $2,521 and joke token Dogecoin gained 0.5%, trading at $0.33.

“There seems to be significant uncertainty in play. Beyond just price, demand for transactions and settlements has waned considerably. Almost all on-chain activity metrics point to a big decline from the all-time highs earlier in the year,” said Simon Peters, analyst at multi-asset investment platform eToro.

Bitcoin recovered some of its losses on Wednesday morning. Chart: Yahoo Finance UK

Bitcoin recovered some of its losses on Wednesday morning. Chart: Yahoo Finance UK

The uncertainty may in part be down to US investigators recovering some $2.3m in bitcoins paid in ransom to a hacking group called DarkSide. The group was involved in a ransomware attack on Colonial Pipeline, the largest pipeline system for refined oil products in the US.

“We have a lot of cash requirements in our country, but we haven’t figured out, in the country or in the world, how to trace cryptocurrency,” CNBC quoted Senator Roy Blunt as saying.

“You can’t trace the ransomware – the ransom payment of choice now. And we’ve got to do a better job here,” he added.

“This news is actually very good for bitcoin. Many market participants, myself included, were expecting President Joe Biden to use crypto as a scapegoat for the hack and to come out with crushing reforms,” said Mati Greenspan, who writes and publishes the investment newsletter Quantum Economics.

“Instead, they were clued in to what we already knew, that it is easier for authorities to catch criminals who use crypto than anything else.”

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Meanwhile the Internal Revenue Service in the US has said it needs more authority from Congress to regulate the cryptocurrency industry and collect information on transfers valued at over $10,000 that mostly go unreported.

“We get challenged frequently, and to have a clear dictate from Congress on the authority of us to collect that information is critical,” commissioner Charles Rettig said during a Senate Finance Committee hearing, adding that “most crypto virtual currencies are designed to stay off the radar screen”.

The Biden administration’s fiscal 2022 revenue proposals include a requirement that cryptocurrency transfers of $10,000 or more be reported to the IRS in the same way that banks report cash transfers. The proposed change would start in 2023.

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