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Why Bitcoin, Dogecoin, and XRP Investors Are Panicking Today

By Rich Smith – Aug 2, 2021 at 10:55AM

Key Points

  • Cryptocurrency prices spiked on low volume over the weekend.
  • But most cryptocurrencies are back in the red on Monday.
  • As Congress debates a controversial definition in its new infrastructure bill, crypto prices could remain volatile.

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Cryptocurrency investors ask: "What exactly is a 'broker'?"

What happened

Some commentators are calling it a "freakout." Others, a "panic."    

Whatever you call it, after a brief respite over the weekend -- which saw Bitcoin (BTC -1.63%) prices for example climb past $42,000 for the first time in months -- cryptocurrencies are crashing again on Monday.  

Here's how prices stand as of 9:45 a.m. EDT for several of the biggest names in cryptocurrency:  

  • Dogecoin (DOGE -5.89%) is down 2.6% over the last 24 hours.
  • XRP (XRP -1.51%), the cryptocurrency that runs on RippleNet, is slipping 1%.
  • And crypto industry bellwether Bitcoin (BTC -1.63%) is crashing worst of all -- down 4.6%.
Red stock market chart with arrows pointing down and a Bitcoin symbol.

Image source: Getty Images.

So what

Ethereum (ETH -3.10%), at least, is still in positive territory for the moment -- up 0.6%. But it's almost a lone green island in a sea of red. So what is it that has cryptocurrency investors feeling so nervous this morning?

It's Congress -- and how the United States Congress ends up defining the word "broker."

Last week, crypto traders had a mini-freakout Friday after reports emerged that the International Monetary Fund has labeled cryptocurrencies "extremely volatile" investments, poor places to "store value" -- and unsuitable for use as national currencies. So far, only tiny El Salvador has made a move to actually do that, though. Of more immediate concern to crypto investors is a new 2,700-page U.S. infrastructure bill that could get a Senate vote "in a matter of days," according to Senate Majority Leader Chuck Schumer).  

Buried within this near-$1 trillion bill is a provision to help pay for American infrastructure by taxing cryptocurrency profits to the tune of $28 billion. As CoinDesk reports today, the main concern here isn't the taxation per se (which is already part of U.S. tax law), but rather an expanded provision that requires cryptocurrency "brokers" to report their cryptocurrency income to the IRS.  

Now what

Here's why this is a problem -- and why Forbes magazine, for example, mused today that it could "kill" the cryptocurrency industry: Under the law as currently written (it's still subject to amendment), "any broker that transfers any digital assets would need to file a return" with the IRS describing those transfers. According to CoinDesk, this rule appears to target primarily cryptocurrency exchanges, but the definition of a "broker" "doesn't explicitly exclude miners, node operators, software developers or similar parties." Nor does it exclude decentralized cryptocurrency exchanges where there is no one operator who would clearly bear the obligation to report.

Crypto lawyer Jake Chervinsky is quoted in Forbes worrying that this requirement "defies logic," and "is literally impossible" to comply with -- "unless the goal is to kill the industry" by imposing "a de facto ban on [crypto] mining in the USA."  

So what does all of this mean for cryptocurrency investors? Basically, it introduces new ambiguity and uncertainty about just what, precisely, Congress is trying to do here (aside from just raise taxes). And as we all know, the stock market absolutely loathes uncertainty. Until Congress gets its ducks in a row and clearly defines which "brokers" it wants reporting in to the IRS, investors in this market should buckle up for more volatility.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

Stocks Mentioned

Bitcoin Stock Quote
Bitcoin
BTC
$16,755.72 (-1.63%) $-278.39
Dogecoin Stock Quote
Dogecoin
DOGE
$0.10 (-5.89%) $0.01
Ethereum Stock Quote
Ethereum
ETH
$1,223.12 (-3.10%) $-39.19
XRP Stock Quote
XRP
XRP
$0.38 (-1.51%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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