Bitcoin led the cryptocurrency market lower on Tuesday, falling about 1% in the past 24 hours to just under $88,000.
Gold, silver and copper fell despite all surging to new all-time highs (albeit pulling back slightly in Tuesday afternoon trading). U.S. stocks rose slightly, with the Nasdaq rising 0.45%.
Cryptocurrency-related stocks fell much further than Bitcoin’s decline would suggest.
The worst-performing company this year — digital asset finance companies — has been hardest hit. Strategy (MSTR) fell 4.2%, XXI (XXI) fell 7.8%, ETHZilla (ETHZ) fell 16%, and Upexi fell 9%.
Other stocks that fell sharply include Gemini (GEMI), Circle (CRCL) and Bullish (BLSH), all down about 6%.
Analysts at digital asset hedge fund QCP Capital said tax loss harvesting is a potential driver of short-term action at the end of the year, especially amid illiquidity. This means investors sell their underwater positions to realize losses, thereby lowering their tax liability.
“We usually see PM at the end of the year [portfolio managers] Paul Howard, senior director at trading firm Wincent, explained: “Not only will they be reducing their exposure to risky assets because of the upcoming holidays, but they will also have taxable events and year-end balance sheets that, in some cases, don’t want to show cryptocurrency holdings.”
QCP also noted that open interest in BTC and ETH perpetual futures continues to decline (by approximately $3 billion and $2 billion respectively), leading to a decrease in leverage and making the cryptocurrency market more vulnerable to large price swings.
“This vulnerability is exacerbated by Friday’s record Boxing Day options expiration, which accounts for more than 50% of total open interest on Deribit,” the firm said in a morning note. “While downside positioning has eased, the persistence of $100,000 call options suggests that optimism about the Santa Claus rally remains, albeit temporary.”
Still, QCP expects any sharp moves to fade into the new year: “Historically, holiday-driven moves tend to be mean reverting, with price action tending to weaken as liquidity returns in January.”
Looking ahead to next year, Wincent’s Howard expects more consolidation to retake losses from early October highs, without any imminent catalysts.
“It will take several months for the asset class’s market capitalization to recover from the current $2.6 trillion to $4 trillion,” he said.