Bitcoin breaks under weight of regulatory scrutiny
Adam Shell | USA TODAY
Speculators beware: The once-high-flying digital currency bitcoin is again feeling the heat from regulators in Asia, causing its price to go into a free fall.
Bitcoin, the best-known cryptocurrency whose skyrocketing price in the past year captured the imagination of speculators and skeptics alike, has come under intense selling pressure early in 2018.
Bitcoin careened 25% lower Tuesday after a startling gain of nearly 1,400% last year and peaking at roughly $19,500 per coin in late December.
The steep drop, which pushed bitcoin to a six-week low of $10,650 and 45% from its prior peak, was driven in part by news that South Korea, a country whose investor base has been at the epicenter of the bitcoin trading boom, was considering a crypto trading ban. That news collided with a Bloomberg report that Chinese authorities, which have already shut down local crypto exchanges, were also planning to block its residents from trading bitcoin on foreign exchanges.
The big fear is that hopes for widespread acceptance of the decentralized, stateless digital currency will be derailed by governments. Many countries see bitcoin as a threat to their traditional currencies and worry that mom-and-pop investors who speculate in bitcoin will lose a lot of money when the perceived speculative bubble bursts, bitcoin watchers say.
"I think regulation and interference by governments is one of the biggest challenges facing bitcoin," Craig Erlam, a senior market analyst at currency trading firm Oanda, told USA TODAY.
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Cryptocurrencies such as bitcoin are powered by the technology known as blockchain, which is akin to an anonymous digital ledger. Bitcoin is trying to distance itself from an early reputation as an anonymous currency used for nefarious purposes, such as money laundering and drug deals.
What the South Korean authorities are trying to do by shuttering crypto exchanges is to "shut down the betting shops," says Craig Pirrong, a professor of finance at the University of Houston. "They perceive bitcoin as a speculative frenzy that will not end well."
As a result, they are trying to minimize the future damage to investors by making it more difficult and costly to trade.
Bitcoin bulls say this isn't the first time bitcoin has gone through a rough patch to start the year, nor the first time it has been under regulatory pressures.
"The bitcoin story is not over; hold on to your bitcoin," says David Mondrus, CEO of Trive, a company that counters "fake news" with the use of blockchain technology.
American regulators are also keeping a close eye on digital currencies.
One U.S. regulator, the Commodity Futures Trading Commission, gave the go-ahead for two U.S. exchanges to start trading bitcoin futures in December. The Securities and Exchange Commission has cracked down on so-called "initial coin offerings," or digital-coin fundraising vehicles, and has yet to approve exchange traded funds that would provide easier investor access to investing in bitcoin.
But fears of a coming regulatory crackdown aren't the only reasons the value of bitcoin has been heading south, experts say. Bitcoin faces other challenges as well:
Speculators wonder: Is the big run over?
At its peak last year, bitcoin was up nearly 1,900% and traded close to $20,000 per coin as investors cheered the creation of bitcoin futures on two major U.S. exchanges, which at the time was viewed as a step toward bitcoin gaining wider acceptance.
But it has suffered a decline of about 45% since its mid-December 2017 peak, spooking speculators who were "previously buying in fear of missing out," Erlam says. Unless bitcoin rebounds, speculators might not return with the same enthusiasm, he warns.
Time is ripe for profits
Now that Bitcoin no longer is going up dramatically, many investors who bought it at much lower prices view it as a good time to sell and take profits, Pirrong adds.
Alternatives to Bitcoin gain fans
Bitcoin was an early leader in the digital currency race. But now there are 1,450 cyptocurrencies, according to coinmarketcap.com. And that means many investors are looking for the next bitcoin, Pirrong says. "Almost anyone can create a cryptocurrency," he says. "People can create substitutes."
And that gets people asking and thinking, "Why should bitcoin be so special?" Pirrong adds.
Bitcoin skidded a further 12% on Wednesday, marking an almost halving in value from its peak price, with investors spooked by fears regulators could clamp down on the volatile cryptocurrency that skyrocketed last year.
The price of bitcoin, the world’s biggest and best known cryptocurrency, fell to as low as $10,0000 on the Luxembourg-based Bitstamp exchange, the lowest since Dec. 1.
Bitcoin touched a peak of almost $20,000 in December — and indeed crossed over that threshold on some exchanges — but has since been roiled by several large sell-offs.
Other cryptocurrencies plunged as well. Ethereum and Ripple were both down heavily after reports South Korea and China could ban cryptocurrency trading, sparking worries of a wider regulatory crackdown.
“There is a lot of panic in the market. People are selling to try and get the hell out of there,” said Charles Hayter, founder of Cryptocompare, which owns cryptocurrencies.
“You have more regulatory uncertainty…and because of these falls you have these other outfalls,” he said, referring to the collapse of some cryptocurrencies in the recent slump in prices.
With South Korea, Japan and China all making noises about a regulatory swoop, and officials in France and the United States vowing to investigate cryptocurrencies, there are concerns that global coordination on how to regulate them will accelerate.
Officials are expected to debate the rise of bitcoin at the upcoming G20 summit in Argentina in March.
“Cryptocurrencies could be capped in the current quarter ahead of the G20 meeting in March, where policymakers could discuss tighter regulations,” said Shuhei Fujise, chief analyst at Alt Design.
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At its lows on Tuesday, bitcoin had fallen 25% in the session, its biggest daily decline in four months. It was a far cry from its peak close to $20,000 in December, when the virtual currency had risen nearly 2000% over the year.
Bitcoin has plummeted before. Marc Singer, an adviser at Singer Xenos in Miami, noted bitcoin fell 93% in value over a five-month period in 2011. The last time bitcoin more than halved in value was from November 2014 to January 2015.
Tuesday’s decline followed reports that South Korea’s finance minister had said banning trading in cryptocurrencies was still an option and that the government plans a set of measures to clamp down on the “irrational” cryptocurrency investment craze.
Separately, a senior Chinese central banker said authorities should ban centralized trading of virtual currencies as well as individuals and businesses that provide related services.
“Bitcoin is deciding whether this is the moment to crash and burn,” said Steven Englander, head of strategy at New York-based Rafiki Capital.
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“My conjecture is that cryptocurrency holders are trying to decide whether to abandon bitcoin because its limitations mean it will be superseded by better products or bet that it can thrive despite them.”
Wild Swings
Cryptocurrencies enjoyed a bumper year in 2017 as mainstream investors entered the market and as an explosion in so-called initial coin offerings (ICOs) — digital, token-based fundraising rounds — drove demand.
While many observers say the recent falls show that the bubble has burst, those backing the nascent markets say that regulation is welcomed and wild price swings to be expected.
“The volatility of bitcoin — and other crypto currencies — is an expected, and important, part of the journey to becoming a mature asset class. We expect the volatility to continue throughout 2018 but fundamentally believe that bitcoin is still in a bull market,” said Christopher Keshian, co-founder of $APEX Token Fund.
Ethereum, the second largest cryptocurrency by market value, was down 18% since Tuesday, according to website CoinMarketCap.
Ripple, the third biggest, has lost 25% of its value over the past 24 hours and was quoted at $1.03, down from a high of $3.81 on Jan 4.
Bitcoin futures maturing on Wednesday on the Cboe Global Markets Inc’s Cboe Futures Exchange were at $10,070, with 1,586 contracts traded, after having opened at $10,850.
“The run-up in bitcoin created a mystique of one-way trading which is being shaken but the pricing requires faith that there will always be demand,” Englander wrote.
“This is far from guaranteed given the existence of alternatives with better characteristics.”
Bitcoin (BTC) saw its price plummet by more than £940 ($1300) today (Tuesday, January 16), after reports of South Korean regulators cracking down on domestic exchanges triggered a worldwide panic sell-off.
The virtual currency, which is the largest of its kind, opened on Tuesday at £9873 ($13,585) and reached a high of £9883 ($13,601), before dipping to £8857 ($12,208) – the lowest price recorded so far this year.
Bitcoin isn’t the only cryptocurrency in troubled waters, however. Ethereum (ETC), Litecoin (LTC) and Ripple (XRP) all experienced a dip in value during the same timeframe, according to CoinMarketCap data.
The situation in South Korea could be described as confused at best, with some agency officials saying they’re preparing to ban the trade of virtual currencies, while others claim the government is merely looking to regulate exchanges.
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“The position is that the Korean authorities are clamping down on unregulated exchanges and exchanges that are not compliant,” explained Ran Neuner, host of CNBC‘s Cryptotrader show, on Twitter last week.
“A ban is not on the cards,” Neuner added.
Some would see this as the perfect opportunity to invest in cryptocurrencies, but don’t get caught up in the hullabaloo. They’re highly volatile and – as with any investment – you should be aware of the risk involved.
Were you burned by Bitcoin’s sudden drop in value? Let us know on Facebook or Twitter @TrustedReviews.
Bitcoin keeps tumbling.
The price of the volatile digital currency briefly dipped below $10,000 around 7 a.m. ET on Wednesday, its lowest level since late November, according to data from CoinDesk.com.
It has dropped nearly 30% this week.
Other popular cryptocurrencies ethereum and ripple also have posted double-digit losses. One virtual currency exchange, Bitconnect, dived 93% late Monday.
It's unclear why bitcoin has had a rough week. Cryptocurrency is a murky market with frequent swings.
"Volatility is quite common in the cryptocurrency world," said Mati Greenspan, a Tel Aviv-based analyst at investment firm eToro, on Tuesday.
The plunge follows a Bloomberg report on Monday that Chinese officials were stepping-up measures to limit cryptocurrency trading, which is already banned on exchanges.
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Investors in South Korea and Japan, the two largest cryptocurrency trading nations, were sitting on the sidelines Tuesday waiting for the regulatory uncertainty to clear before placing further bets, said Greenspan. He believes the light trading volume caused bitcoin's price to plunge.
Bitcoin approached a record $20,000 in mid-December as it launched on futures exchanges in the United States. But it has since fallen sharply on intense regulatory scrutiny.
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Trading is booming in South Korea, but officials began clamping down late last month.
South Korea banned opening anonymous virtual currency accounts and put in place new laws giving authorities power to shut down digital currency exchanges. Officials are currently weighing halting trading on exchanges.
--CNNMoney's Daniel Shane contributed to this story.
