The saying goes, “a week is a long time in politics” but when it comes to a cryptocurrency such as bitcoin, this last week has been one of epic proportions. Here, The Fintech Times takes a look at the regulation, guidance, rise and fall of bitcoin over the last seven days and beyond.
Bitcoin background
Having already seen its price steadily rise over the past few months, pundits were excited to see its price reach $40,000 after previously hitting the heady heights of $19,00 in 2018 before crashing spectacularly soon after when users sold $100m of the currency overnight. It hit a further high note of $42,000 exactly one week ago on January 8th but has since seen a 12% slide after investors once again began a mass sell-off.
The market has been buoyed by stimulus cheques and global attitudes since the pandemic began, soaring more than 700% since March 2020. What’s more, talk of central bank digital currencies (CBDCs) from China, Africa and even America, has brought the concept of stable coins and other alternative currencies into the minds of ordinary citizens like no other marketing campaign could.
The market as a whole
On January 4th in the US, the Office of the Comptroller of the Currency (OCC) gave the green light in a letter, clarifying national banks’ and federal savings associations’ authority could participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank permissible functions.
Jeffrey Alberts, Partner at Pryor Cashman and a leader on cryptocurrency and blockchain legal issues, said: “The OCC’s new interpretive guidance is a game-changer both for banks and for cryptocurrency companies. First, it expands what many considered to fall within the permissible business of banking. This is likely to have implications not just for the use of cryptocurrencies but also other financial innovations. Second, it will permit US banks, which have lagged behind international competitors in financial innovation, to take the lead in offering cutting-edge services to consumers. Third, it will permit cryptocurrency companies to take advantage of the well-developed compliance programs at regulated banks. It has proven challenging for cryptocurrency companies to build compliance programs from scratch. This guidance will allow many of these cryptocurrency companies to let banks handle compliance, much as Fintech payments companies do.
Investor focused
While bitcoin is not a stablecoin, it has benefited from the ongoing worldwide discussion into mainstream use, and has seen its own price rise in turn. This renewed confidence came not just from the general public, but previous bitcoin investors as well, as data suggests that top 100 richest bitcoin addresses bought 17 times more BTC than sold in the last 30 days.
Only 8 out of the 100 addresses sold 20,333 Bitcoin worth $660,59 million during the period. The remaining 56% of the addresses did not record any change.
Crypto Parrot researchers explained the possible reason for the activities by the top 100 rich addresses. According to the research report: “While more whales are adding to their assets, it seems fewer whales are looking to sell-off. The 56 addresses did not move their bitcoins. Bitcoin’s price was increasing due to high demand, and there was relatively little bitcoin available to buy. Furthermore, the lack of movement in these wallets indicates they might belong to investors who are betting on further price growth in the future.”
Meanwhile, stories emerged of citizens desperately trying to claw back their lost bitcoin, from a man that only had two password attempts left before his $220 million stash would self-destruct. And another that is desperately searching local landfill sites for the hard drive he mistakenly threw away which holds approximately $280 million in bitcoin.
The crash
Shortly before bitcoin began to head south after breaking the $40,000 barrier, CEO of Luno, Marcus Swanepoel, predicted that while bitcoin has previously surged in times of economic struggle, “Even the most bullish of bitcoin advocates could not have foreseen such a meteoric rise in price in such a short space of time. If history has taught us anything, it’s that a surge of price in bitcoin is normally followed by a small pullback before it gears up again for the next price cycle.”
That was certainly what happened on Monday 11th January, just a few days after passing through the $40,000 barrier. And while it did climb again later in the week, another tumble has seen the price come crashing down with a 20% swing.
Anatoly Crachilov, co-Founder and CEO of Nickel Digital, commented: “Bitcoin often exhibits large upside swings that tend to be followed by corrections. This is normal behaviour for new technology in the early stage of its adoption curve. The price action for such assets is never meant to be a straight line. Only professional investors with a long-term view on the underlying technology should have exposure to this asset class. They also need high-risk tolerance levels and, importantly, never lose sight of the forest for the trees.”
Investment warnings
In the UK, it wasn’t long before an FCA notice highlighted the dangers of investments in volatile currencies such as bitcoin, however, did investors take any notice? Throughout 2020, cryptocurrencies gained the attention of large investment firms this year, part of the reason behind bitcoin’s gains however, these big names can cause price drops of their own.
Myron Jobson, Personal Finance Campaigner, interactive investor, said: “There is no denying that cryptocurrency is gaining more mainstream attention thanks to the stratospheric rise of bitcoin, the first and best-known cryptocurrency, in recent history. Argo Blockchain, a publicly-traded blockchain technology company focused on large-scale cryptocurrency mining, was the most bought investment on interactive investor since the start this year (to 8 January 2021).”
With Philippe Bekhazi, CEO of XBTO Group, adding. “Most institutional investors seem to be running similar algos to accumulate bitcoin on dips. Some of them are also looking beyond bitcoin into ethereum and some even further into other crypto assets. These new crypto owners will take some profits which will have a significant downward impact on the price of bitcoin and other crypto assets, so investors should be mindful of that impact.”
Founder and CEO of Glint, Jason Cozens, warns that the financial system punishes savers and forces consumers into risky investments, such as Bitcoin, to maintain their purchasing power.
He said, “The FCA’s warning to UK consumers over the risk of Bitcoin’s volatility suggests there is real concern from the financial establishment over crypto entering the mainstream. The financial system has punished savers for years, with historically low-interest rates and the insidious creep of inflation hitting consumers’ purchasing power and forcing many to risk everything through speculative investments, such as bitcoin and the stock market, just to ensure that their wealth remains at its current level. Bitcoin’s rise is symptomatic of this.”
“Consumers want an alternative to ensure that their finances work for them. Currently, bitcoin appears to be the in-vogue option, but it requires considerable financial knowledge and a huge amount of time with almost constant attention needed to buy and sell at the correct time and avoid hitting returns. Whilst not offering the risky, overnight gains of bitcoin, gold is once again demonstrating its considerable value as the ultimate safe haven, with steady long-term increases to mitigate against risky investments and almost non-existent interest on cash savings.”
Hope for bitcoin still apparent
While Yang Li, chief growth officer for Ziglu, also warns that the currency has been a victim of its own success, he suggests that there are other issues than investors. He said, “Covid-19 has had a big effect on manufacturing the hardware needed for those installing and maintaining bitcoin mining rigs. Miners had been entering the market seeing that it’s very profitable to mine Bitcoin but all of a sudden there are supply chain issues so there is apprehension about whether it’s the right time to invest in mining. There is pull-back, people are waiting to see where this all-time high settles before they commit further.
“One reason the value has not bounced back immediately is that retail investors are apprehensive after regulators across the world, including the Financial Conduct Authority, issued a warning about the volatility and unregulated nature of cryptocurrencies. So we are seeing a small blip but it is still up 22 percent from January this year.”
Finally, research by Nickel Digital highlights several factors that make bitcoin attractive to institutional and other professional investors, which bode well for its long-term prospects. These include:
- Inelastic immutable monetary policy. The supply of bitcoin is capped at 21 million and its issuance schedule is hardcoded and completely uncorrelated with changing demand, which makes it a powerful hedge against currency debasement and inflation as governments and central banks are engaging in multi-trillion dollar stimulus packages.
- Diversification qualities. Analysis by Nickel reveals that bitcoin price movements have exhibited a low correlation to equity market moves over the last 10 years. During major S&P500 drawdown periods, bitcoin demonstrated an independent behaviour pattern. This makes bitcoin an important diversifier for portfolio allocation purposes. For example, in April 2011, the S&P 500 fell by 19%, while the value of bitcoin increased by 76%. In April and July 2019, the S&P 500 fell by 7% and 6% respectively, but the price of bitcoin rose by 55% and 14%.
- Powerful recoveries. Whilst there are a number of instances when market liquidity implosions similar to March 2020 led to price of bitcoin correcting in unison with the S&P500, it has staged a powerful recovery, similar to 2020, when bitcoin delivered over 300% appreciation.
- Engagement of large payment platforms. In late 2020 PayPal made bitcoin available for instant purchase through its PayPal mobile application to its 346m users and in early 2021 it will make bitcoin a funding source for digital commerce at its 26m merchants, whilst Visa is offering a credit card linked to bitcoin.
- The infrastructure around bitcoin and other digital assets is improving. For example, established financial institutions such as Fidelity now offer bitcoin custody services, and several major central banks are seriously considering the possibility of developing their own digital currencies, which would provide a strong endorsement for the concept.
Michael Hall, co-Founder and CIO of Nickel Digital, added: “As we observed on 4th January, bitcoin, due to its inelastic supply model, is experiencing upside volatility which may correct sharply but tends to resolve reasonably quickly at higher levels as price discovery continues. We do not believe there has been any fundamental change in the outlook for bitcoin which is now increasingly owned by longer-term investors, weighted towards Europe and North America, looking to buy and hold within multi-asset portfolios.”
