For the last few weeks, Bitcoin has been trading in quite a narrow range. The big picture explains that the price of BTC bounces up and down inside a big triangle until it breaks out to the downside invalidating the triangle which triggers massive panic selling. We have seen this happen twice before recently and now it is back at a point where a similar scenario is in sight. The bullish volume seems to be fading and any attempt to initiate a rally is met with twice the selling pressure. All this is happening at a time when we are expecting US based cryptocurrency investors to file for taxes by April 17th. According to reports, US households owe $26 Billion in cryptocurrency taxes as part of 20% capital gains tax to the US Treasury.
Apart from technical indicators, we have fundamental indicators that support the likelihood of a further price drop to lower levels for 2018. From the very onset, crypto tax laws have been ambiguous. No proper mechanism for taxing or tax collection had been devised. So, last year some paid taxes while most did not. However, this time around regulators seem a lot more serious regarding taxation of crypto transactions which has a lot of investors worried, especially those who owe more than they can pay.
The current tax policy on cryptocurrency transactions is anything but fair. If you bought 1 BTC at $20,000 and the price is now $7000, you will pay taxes on the $20,000 not the current value of $7,000. You can report losses but capital losses of individual tax payers are limited to $3000 per calendar year. This means if the price has fallen a lot more, forget about the coins you may even end up paying just for the tax from your own pocket. $26 Billion in taxes is a big number and the IRS is determined to collect that amount. They have made it clear that any discrepancies in reporting will result in further auditing.
Investors who owe more than they can pay will have to sell their BTC to pay for their taxes. This means the price will drop as there are not many buyers around to match this magnitude of selling. In addition to this, the selling will result in the price breaking out of the triangle to the downside which will in turn trigger more panic selling and will push the price lower. However, it is important to note that a price in $4000 or $5000 will be very attractive for a lot of waiting money to ignore. So, the recovery will be swift.
We can expect to see some bullish momentum in early May which could push the price towards $10,000 and higher. However, I do not expect the price to cross $20,000 before mid July or August. Having said that, I am convinced the price of BTC will cross the previous high to reach a target of $70,000 to $100,000 per BTC somewhere around late 2018 or early 2019. This will most likely coincide with a bearish stock market which will result in an influx of new capital into cryptocurrencies as more and more institutional investors get involved.