LONDON/GUANGZHOU, China Bitcoin and other digital currencies plunged on Friday as a proposed capital gains tax hike from U.S. President Joe Biden led to a wave of selling.

At as midday EST, bitcoin was down 7.3% at $49,730, according to Coin Metrics data. It's the first time bitcoin has traded below $50,000 since early March. Ether fell to $2,320, down 8%. XRP, the fifth-biggest cryptocurrency, plunged 16%.

This wiped out more than $200 billion of value from the entire cryptocurrency market, according to data from CoinMarketCap.

"The market has run up quite a bit overall, and it'sprobably cooling off before the next leg up," Vijay Ayyar, head of business development at cryptocurrency exchange Luno, told CNBC by email.

President Biden is expected to raise long-term capital gains tax for the wealthiest Americans to 43.4%, including a surtax. That would be higher than the top federal tax rate on wage income. The new tax rate would apply to returns on assets held in taxable accounts and sold after more than a year.

This triggered a sell-off in stock markets overnight, with all three major U.S. indexes ending Thursday's session in the red. Analysts said fears over Biden's capital gains tax proposal may be extending to crypto investors, who have had a great year with the price of bitcoin having climbed more than sixfold in the last 12 months.

Still, one crypto entrepreneur said Biden could be doing his industry a favor.

"It would make even greater sense to play that oldest trick in the manage-your-finances-smart book: borrow against your assets to avoid capital gains taxes," said Antoni Trenchev, co-founder of crypto lender Nexo.

"And what better collateral than one that despite today's price dip, likely caused by the said proposal appreciates in value like Bitcoin?"

"Things are getting more established," Eric Demuth, CEO and co-founder of digital asset broker Bitpanda, told CNBC's "Squawk Box Europe" Friday. "The more money that gets into the market, the less volatility there will be."

"And for the retail investors who are going in there, the strategy is always never to put everything in one basket and just put a very small fraction of your portfolio into cryptocurrency, into bitcoin. It doesn't matter if you are a strong believer or not, the diversification of your assets is key."

However, concerns over a regulatory crackdown on bitcoin continue to cloud the market. Jesse Powell, CEO of a major cryptocurrency exchange called Kraken, warned governments could clamp down on the use of bitcoin and other cryptocurrencies.

India is planning to introduce a law to ban the trading or even ownership of cryptocurrencies, Reuters reported last month. In February, U.S. Treasury Secretary Janet Yellen called bitcoin a "highly speculative asset" and said she was worried about potential losses for investors.

Authorities around the world are looking into how to regulate bitcoin. The Deputy Governor of the People's Bank of China, called bitcoin an "investment alternative" last week, which marked a more progressive tone on cryptocurrencies after a fierce crackdown by the country's regulators on the industry in 2017 and 2018.

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Over $200 billion wiped off cryptocurrency market in a day as bitcoin plunges below $50,000 - CNBC

Bitcoins rally appears to be running out of steam, at least for now.

The digital currency dropped again Friday, briefly falling below $50,000a decline of more than 20% from its record of $64,829 on April 14.

Bitcoins high coincided with the stock-market debut of Coinbase Global Inc., the biggest U.S. cryptocurrency exchange. The two events marked the pinnacle of a heady rally for cryptocurrencies that began last year. Bitcoins price more than tripled in 2020 and doubled to start 2021 before slipping.

The rally cratered last Saturday when bitcoin suddenly fell as much as 17% to $52,149with half the decline occurring in about 20 minutes. Although it recovered some of those losses by Monday, the price has steadily declined, sitting Friday afternoon at $50,620.

Bitcoins momentum lately has been showing signs of flagging, said Michael Oliver of the research firm Momentum Structural Analysis. Since bitcoin crossed $60,000 in March for the first time, its pace of gains has slowed and it has traded in a relatively narrow range. That was a sign, he said, that the rally could falter, as it finally did over the weekend. We think bitcoins broken for the time being, he said, pointing to technical trend lines.

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Behind Bitcoins Recent Slide: Imploding Bets and Forced Liquidations - The Wall Street Journal

Bitcoin is setting up for a near-term downturn that could see it shed a good chunk of its recent gains, even if the longer-term outlook appears healthy for the worlds No. 1 crypto.

Thats the view of a number of analysts after bitcoin prices BTCUSD, -3.55% breached a key technical level following the exuberance for digital assets in the wake of Coinbase Globals COIN, -0.63% listing on the Nasdaq last week.

Bitcoin was off 1.8% late-morning Wednesday in New York, changing hands at around $56,000 on CoinDesk. That puts the crypto about 14% below its all-time peak at $64,829.14.

On Tuesday, researchers at Bespoke Investment Group noted that Tuesday marked bitcoins first time, in a 24-hour period, in which it fell below its 50-day moving average since at least 2014, after recording 193 straight days of prints above that level. Bitcoin was first created back in 2008-09.

Market technicians use moving averages as barometers of bullish and bearish trends in an asset.

Pankaj Balani, CEO of Delta Exchange, in emailed comments, said that bitcoin has managed to hold above its 50-day moving average in recent trade but warned that a sustained breach of the short-term price could lead to a slide to around $40,000.

The 50 DMA has been a crucial support forBitcoinsince October last year and it has held this support every time in this rally. This time around however, we seeBitcoins momentum fizzling out and BTC struggling to hold this support, Balani explained.

The Bespoke researchers noted that bitcoin tends to see declines, in the one-week, one-month, three-month periods, after upward trends lasting at least 100 days are snapped.

One week later, [bitcoin] was down all four times for a median decline of 4.6% and declines all four times. One and three months later, performance was even worse with median declines of 6.5% and 13.4%, respectively, the report read.

Researchers at JPMorgan Chase & Co. JPM, +1.91%, including Nikolaos Panigirtzoglou, wrote in a Tuesday report that waning momentum for bitcoin could spell a spiral lower for the volatile asset. The analysts said a failure to retake $60,000 could be the trigger for a sharp drop.

The JPMorgan strategist point to bearish trends in bitcoin futures markets BTC.1, -4.42%, where institutional and professional investors go to hedge their exposures to the crypto.

Referring to the attached chart, JPMorgan says that the four episodes of greater than a 10% decline in their futures position proxy, including the one over the past few days, have been attributed to an inability to trend higher.

Similar to the previous three episodes, it is likely that momentum traders, such as [commodity trading advisors] and crypto funds, were at least partly behind the buildup of long bitcoin futures in recent weeks and thus also likely behind the unwinding over the past few days, JPMorgan concluded.

If the bitcoin price fails to break out above $60,000 soon, the momentum signals shown in Figure 9 will naturally decay from here for several months, given their still elevated level, the analysts wrote.

JPMorgan researchers arent 100% sure that this time bitcoin will follow a decline with a strong snap back higher as was seen in November and in mid-February. Notably, the analysts say that flows into bitcoin have been tepid and the downturn appears to be gathering steam.

So far this year bitcoin prices have been buoyant, up 94% year to date. By comparison, gold GC00, -0.06%, which is seen as a rival to bitcoin, is down 5.5% in 2021. The Dow Jones Industrial Average DJIA, +0.67% and the S&P 500 index SPX, +1.09% are both up around 11% in the year to date.

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Bitcoin bears are stalking crypto prices --- here's how low they could go - MarketWatch

Wyomings economy is powered by some of the oldest industries in human history, including mining, agriculture and tourism. But in recent years the state has emerged as an unlikely champion of far newer inventions: cryptocurrencies and the blockchain technology that powers them.

Now, the Cowboy State is arguably the most crypto-friendly jurisdiction in the United States, thanks to state leaders shepherding a series of new laws.

These changes have encouraged several high-profile companies in the industry to move operations from traditional high-tech hubs like San Francisco to Wyomings capital city of Cheyenne, including crypto exchange Kraken, blockchain platform Cardano and payment protocol firm Ripple Labs. But it has also put the state on a potential collision course with federal regulators who appear far more skeptical of the costs and benefits of blockchain technology than libertarian-leaning Wyomingites.

Wyoming State Sen. Chris Rothfuss, chairman of the chambers blockchain committee, told MarketWatch that a desire to diversify the Wyoming economy has been a primary motivator of his states embrace of the crypto industry.

We do a lot of coal, oil and gas, and those dont necessarily have the bright, shiny futures they once did, the Democrat said. Were really looking for opportunities to bring advanced emerging technologies to Wyoming.

Rothfuss said that its not lawmakers like him who were responsible for driving change in Wyoming. Though the Wyoming state government has a history of business-friendly regulation, he argued that its the states residents, along with entrepreneurs who grew up in the state but left for better economic opportunities, who deserve much of the credit for driving these regulatory changes.

One such member of the Wyoming diaspora is Caitlin Long, founder and CEO of Avanti Bank & Trust, which aims to provide custodial services for institutional investors in cryptocurrencies. A Wall Street veteran with two decades of experience working for Salomon Brothers, Credit Suisse CS, +4.40% and Morgan Stanley MS, +3.40%, she became interested in bitcoin BTCUSD, -3.55% in 2012 after appreciating the potential of blockchain technology to enable faster settlement of financial transactions.

In 2017, Long attempted to endow a scholarship for female engineers at her alma mater, the University of Wyoming, using appreciated bitcoin, but found the school wasnt able to accept the donation because Wyoming laws barred the operation of crypto exchanges in the state. This episode motivated her to advocate for changes to state law regarding digital assets.

Long left Wall Street in 2016 and in 2018 volunteered to serve on the Wyoming Blockchain Taskforce, where she worked with the legislature to craft more than a dozen new laws related to blockchain and digital assets. As the project gained momentum, Long said, it attracted public attention that encouraged even greater support from lawmakers.

The legislature held hearings on the laws where a diverse set of Wyomingites showed up, some driving upwards of eight hours to be there. When the legislators walked in the room, they saw young people who were eager and anxious and wanted legal and regulatory clarity, Long said in an interview with MarketWatch.

A Digital Wild West

The laws enacted by Wyoming in 2018 and 2019 clarified the treatment of digital assets in commercial law, setting the legal foundation for so-called smart contracts, or contracts that are automatically executed by computer code on the blockchain. They also made it easier for crypto investors to set up limited liability company though which investors who live outside the state can still store their digital assets in Wyoming for legal purposes. On Wednesday, Wyomings Republican Gov. Mark Gordon signed legislation to give legal status to decentralized autonomous organizations, or member-owned communities that operate using blockchain technology.

The changes also enable Wyoming banks to serve as custodians of digital assets under a unique legal framework that enables institutional investors to retain direct ownership of digital assets through a custodian bank.

Long argues this will make Wyomings banks the place where investors prefer to store their digital wealth.

The changes also required the Wyoming Division of Banking to issue a new type of banking charter, called a special purpose depository institution, for banks that deal mostly in digital assets. Kraken Bank, a wholly owned subsidiary of cryptocurrency exchange Kraken, became the first bank to be issued this charter in September 2020. Avanti was the second, in October 2020.

David Kinitsky, chief executive of Kraken Bank, told MarketWatch that his company chose to domicile in Wyoming because its the only state offering a banking charter that outlines exactly how bank regulators will supervise a bank that holds digital assets.

Wyoming actually did the work on paper to say how exactly they expect you to operate and how they are going to come in and examine you, he said. None of the other charters in any capacity address digital assets.

Some observers, however, are concerned that Wyomings new charter will expose the national banking system to new risks. The Federal Reserve Bank of Kansas City is reviewing Krakens application to gain access to the Federal Reserves payment system, as most state-chartered banks are entitled to, which would give the bank an account at the Fed and membership in the Fedwire settlement system.

Rob Nichols, chief executive of the American Bankers Association, told the National Conference of State Legislatures earlier this month that because the SPDI charter enables crypto banks to be chartered without becoming insured by the Federal Deposit Insurance Corporation, it gives those banks a competitive advantage.

These entities see the value in getting access to Federal Reserve payments systems like the Fedwire Funds Service and the automated clearinghouse (ACH) network, but do not want to play by the same rules as traditional banks, Nichols said. Finding chartering authorities that are willing to redefine what it means to be a bank introduces risks to the financial systems safety and soundness, consumer protection laws and international reputation.

Albert Forkner, commissioner of Wyomings Division of Banking, said however that it is in part the FDICs reluctance to give any guidance to its member banks on the subject of custody of digital assets that motivated Wyoming to create this new charter. Meanwhile, he added, the charter requires banks to be fully reserved meaning it must have enough cash or cash-like securities on hand at all times to meet any possible customer withdrawal request.

These businesses felt they were being locked out of traditional banking institutions, he said in an interview with MarketWatch. So we want a non-FDIC insured bank, but the trade off is that it would be 100% reserved.

Learning from South Dakota

Forkner likened the changes that the Wyoming Division of Banking is implementing to South Dakotas decision in the early 1980s to eliminate interest-rate caps in order to attract credit card companies to the state. Amid sharply rising inflation rates in the late 1970s and early 1980s, credit card issuers like Citibank were losing money because they couldnt legally charge enough in interest to offset the general rise in prices.

The South Dakota economy was suffering from depressed agricultural prices, motivating the governor to strike a deal with Citibank to eliminate its interest rate cap in exchange for the company moving its credit-card operations to the state. Today, the financial services industry employs roughly 30,000 South Dakotans out of a labor force of roughly 430,000.

Its a useful analogy, said state Sen. Rothfuss. Thats the way that a transformative change to the states economy can happen just by listening, just trying to identify needs of a changing market and meet the needs of innovation.

Wyoming, however, does not hold its fate as a future hub for the crypto industry in its hands alone, given that the Kansas City Fed still has the power to grant or deny access to the central banks payment system.

Its borderline essential to the success of Wyomings charter for the Fed to welcome institutions like Kraken Bank into its system, Forkner said, which would enable real-time settlement of transactions and create a nearly frictionless gateway between the worlds of traditional money and cryptocurrencies like bitcoin.

Kraken Banks CEO Kinitsky said that he expects the Kansas City Fed to approve the banks application, but argued that federal regulators more broadly have been too slow to provide the crypto industry with a regulatory framework specific to this new technology.

You hear about the concept of the innovators dilemma in business, but it happens in government as well, he said. The United States is the de facto leader in financial services by some margin, so we have bigger fish to fry. When youre a smaller jurisdiction whose financial infrastructure doesnt support the global economy, its a different proposition and you can move much faster.

But Wyoming is now forcing federal regulators to at least stake out a position on these issues, and he believes the crypto economy could be a boon to the state for years to come.

Were already seeing other states borrowing liberally from the Wyoming playbook, but their moat is not whats on paper, he said. Wyomings secret sauce is they have a very supportive legislature, public opinion and governors office that view this is an important industry.

See also: Crypto for the long term: whats the outlook?

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How Wyoming became the promised land for bitcoin investors - MarketWatch