Bitcoin led crypto markets on Tuesday down about 1% over the past 24 hours to just below $88,000.
The drop came even as gold, silver and copper all rose to record highs (although it has pulled back a bit in Tuesday afternoon trading). US shares advance modestly, the Nasdaq rises by 0.45 per cent.
Crypto-related stocks showed far steeper declines than the drop in bitcoin might suggest.
The worst performers of the year – financial companies with digital assets – were hit hardest across the board. Strategy (MSTR) fell 4.2%, XXI (XXI) fell 7.8%, ETHZilla (ETHZ) fell 16%, and Upexi fell 9%.
Other significant decliners included Gemini (GEMI), Circle (CRCL) and Bullish (BLSH), all down around 6%.
Analysts at digital asset hedge fund QCP Capital flagged tax loss harvesting as a potential driver for short-term action into the end of the year, particularly in illiquid conditions. This means investors sell their underwater positions to realize losses, lowering their tax liabilities.
“The end of the year typically sees PMs [portfolio managers] trimming their exposure to risk assets, not only with upcoming holidays, but also creating taxable events and year-end balance sheets that in some cases don’t want to show cryptocurrency holdings,” explained Paul Howard, senior director at trading firm Wincent.
QCP also noted that the continued decline in open interest across BTC and ETH perpetual futures – falling by around $3 billion and $2 billion respectively, has diluted leverage and left crypto markets more vulnerable to large price swings.
“This vulnerability is compounded by Friday’s record Boxing Day alternatives expiration, which represents over 50% of Deribit’s total open interest,” the firm said in a morning note. “While downside positioning has eased, persistence of $100,000 calls suggests residual, if tentative, optimism for a Santa rally.”
Still, QCP expects any sharp moves to fade into the new year: “Helligy-driven moves have historically tended to return, with price action often fading as liquidity returns in January.”
Looking ahead to next year, Vincent’s Howard expects more consolidation with no imminent catalyst to recover the decline from the early October highs.
“It will be many months before the asset class can return to a $4 trillion market cap” from the current $2.6 trillion, he said.
