It is difficult to talk about cryptocurrencies without mentioning the word “liquidation.” Liquidity is one of the most important factors that need to be evaluated when investing in any asset. The cryptocurrency market, where huge price fluctuations are common occurrences, serves as a great example for current discussions around liquidity.
For those who don’t know what liquidation means, it basically means “to sell assets in order to pay off debts.” In other words, when an investor liquidates his or her cryptocurrency holdings, the proceeds from that sale are used to cover various expenses, including paying for personal expenses and perhaps even income taxes.
What is Cryptocurrency Liquidation?
As cryptocurrencies continue to gain more popularity among investors of all types, the number of people liquidating cryptocurrency assets has been on a steady increase. There are numerous reasons why cryptocurrency owners might want to sell their digital currency holdings, including huge gains and taxes.
When it comes to taxes, capital gains taxes will need to be paid on the difference between the sale price and the original purchase price. Capital gains taxes are paid either when investors file their income tax return or when they sell assets, whichever comes first. Hence, in order to avoid paying capital gains taxes twice (in many cases), it is better for cryptocurrency owners to liquidate their digital holdings before the end of the year.
Data from the Bitcoin Up review shows that the number of Bitcoin users has been steadily increasing over the past few years. In fact, 2017 saw significant growth in this department, with the number of Bitcoin users quadrupling from about 1 million to more than 4 million. You should aware of more Bitcoin news before buying or selling bitcoins.
Interesting Statistics
In fact, there are quite a few interesting statistics when it comes to cryptocurrency liquidation. For example, Coinbase data shows that cryptocurrency owners in the United States tend to hold digital currency assets for a significantly shorter period of time when compared to other countries, such as Canada and the UK.
In this context, it is worth mentioning that there have been several reports that have highlighted how exchanges help investors avoid paying taxes on their gains from investing in cryptocurrencies.
Rapid Liquidation
There are several factors that might contribute to rapid cryptocurrency liquidation. The high volatility in the cryptocurrency market is one of the main reasons why investors tend to quickly offload their digital currency holdings, especially if they can capitalize on short-term gains.
On top of this, there is also a growing number of people who are only interested in investing in cryptocurrencies for short periods of time and not necessarily as a long-term investment.
Liquidation can also be attributed to the fact that cryptocurrency owners tend to invest in digital assets with the sole intention of making quick gains and getting out, rather than holding assets for the long term. Unfortunately, this also means that cryptocurrency investors are not always interested in learning about or understanding the underlying principles of cryptocurrencies and how they work.
With many first-time investors simply wanting to make a quick buck with little regard to risk management strategies, it is important for them to understand how liquidity can affect their digital assets.
Summary
Liquidity may seem like one of the less pressing issues that cryptocurrency investors face, but it is definitely worth talking about. After all, cryptocurrencies are relatively new and there haven’t been enough studies done that investigate liquidity in this market. That being said, the lack of liquidity in the cryptocurrency market could be one of the main reasons why digital assets are still very volatile and prone to price swings.
