Over the past few weeks, the mainstream media has tried to justify the extreme volatility of the cryptocurrency market, and specifically the price movements of bitcoin, by connecting them to news.
This week, several media outlets reported that the price of bitcoin had fallen from $9,000 to $8,000 due to the ban imposed by Twitter on cryptocurrency-related advertisements. In a report, CNBC stated that the price of bitcoin had declined by 40 percent after Twitter released its strict policy on regulating cryptocurrency and ICO advertisements.
In reality, when the report was released, the price of bitcoin had declined by 12 percent, and the movement did not coincide with Twitter’s ban on cryptocurrency ads. The social media giant happened to have banned ICO ads when the most dominant digital currency in the cryptocurrency market was starting to lose momentum.
There exist a wide range of factors that could have contributed to the price movements of bitcoin and other major cryptocurrencies. Several analysts have attributed the recent decline in the price of bitcoin to the futures market operated by the Chicago Board Options Exchange (Cboe) and CME Group. PhilCrypto, a respected cryptocurrency researcher, stated that the decline in the price of bitcoin from $8,000 to $7,000 coincided with the Cboe bitcoin futures market demonstrating record volumes.
It is entirely possible that institutional investors and retail traders are manipulating the market in order to cash out their short contracts or futures contracts, and that explains the sudden surge in the price of bitcoin from $8,000 to $20,000, and the abrupt drop in bitcoin’s value from $20,000 to $6,000.
But according to Bill Barhydt, the CEO of cryptocurrency remittance company Abra, there exists a lack of demand from institutional investors and retail traders from the West, in contrast to places like Japan and South Korea. Contrary to the anticipation of the cryptocurrency community, the debut of the Cboe and CME bitcoin futures markets were poor, and the U.S. bitcoin futures market struggled to demonstrate rapidly increasing interest in the cryptocurrency market among institutional investors.
Aaron Brown, former Managing Director and Head of Financial Market Research at AQR Capital Management, emphasized that while bitcoin price movements have been smooth throughout the launch of the US bitcoin futures market, little interest was shown toward cryptocurrency investment vehicles.
“There was little interest in the derivative contracts, which account for only a few thousand Bitcoin, out of a circulating supply of 17 million. Institutions mostly stayed on the sidelines. No new vehicles for retail investment emerged. Bitcoin prices did not stabilize: They continued to move at around 100 percent annualized volatility, as they have for most of the currency’s history,” Brown wrote.
In addition to the slow growth rate of the US bitcoin futures market, the decline in the adoption of bitcoin by retailers and strict regulations imposed on both businesses and investors could have contributed to bitcoin’s price drop.
Hence, it is illogical to conclude that the decline has been caused by news such as Facebook, Google, and Twitter banning blockchain and ICO advertisements, and it is far-fetched to justify each price movement as based on a particular market event.
THE ASIAN FACTOR
Asia’s significance to the cryptocurrency world can’t be overstated. With some of the biggest exchanges in the world including Binance, Bithumb, Upbit, Huobi, OKEx and bitFlyer, the Asian market has been a primary market maker for most cryptocurrencies. The world’s largest Bitcoin exchange, Bitfinex, is headquartered in Hong Kong and accounts for over 10% of all Bitcoin trade volume globally.
With this much significance in the crypto market, any regulation that affects cryptocurrencies in Asia is bound to have a ripple effect on the global market. One such development is Japan’s ongoing crackdown on exchanges that has seen two crypto exchanges close up shop after failing to meet the country’s Financial Services Agency’s standards. The crackdown is Japan’s way of preventing another security breach as happened with the Coincheck exchange in which hackers made off with $500 million worth of digital tokens. The crackdown has slowed down the market in one of the most important crypto nations in the world, and most cryptocurrencies are bleeding as a result.
China, which was once considered a cryptocurrency hub, has since turned against crypto by outlawing cryptocurrency exchanges and initial coin offerings. Even though the ban was imposed late last year, many Chinese traders continued trading through foreign exchanges. However, the government’s crackdown has now extended to blocking access to all domestic and foreign exchanges and ICO websites through the People’s Bank of China, the country’s central bank. This may wipe out cryptocurrency trading completely in the world’s most populous nation, and the results would be devastating.
Cryptocurrency exchanges in other Asian nations have also experienced slowed growth this year as citizens shy away from the market due to a vague regulatory framework. India has been one of the casualties, with cryptocurrency exchanges registering a very worrying decrease in volume of up to 90%. According to industry experts, many traders have adopted a wait-and-see attitude as they assess how the ambiguous regulatory framework will shape up in the near future. Even though cryptocurrencies haven’t been declared either legal or illegal, banks and other financial institutions have warned their customers to steer clear of them. Banks such as Citibank, the State Bank of India, and HDFC Bank have issued stern warnings to their customers against using their debit and credit cards to purchase digital assets, a move that has instilled fear and caution in the hearts of many.
A HANDS-OFF ATTITUDE
Many governments and regulatory bodies around the world have resorted to a hands-off approach regarding the cryptocurrency industry, a move that, though originally helpful, is now hurting the industry. When the crypto industry was still in a nascent stage, regulators decided to first monitor its progress before formulating policies to govern trading. This worked great for some time, as people could trade with no restrictions.
This has changed in recent times, as traders are cautious of investing in volatile assets with no explicit regulations. Japan is a nation that has a clear policy for the industry and has even gone as far as recognizing Bitcoin as a legal payment method. Sadly, other nations haven’t followed suit, and the speculation about what direction they will take is being reflected in the dropping market values of most cryptocurrencies.
THE WAY FORWARD
The cryptocurrency universe is still divided on how much of a role the government should play in regards to regulation. However, the complete lack of it in most markets and the hostile regulations in some markets like China are hurting the industry deeply. Bitcoin is struggling to stay above $7,000, and the other major cryptos aren’t faring well either. Ripple’s XRP is down more than 70% since the year began, while Ethereum’s ETH has hit its lowest levels since November of last year.
Regulation alone is not to blame. There have been other contributing factors, such as the onslaught on the industry by major digital ad providers, which have continued to stifle the industry. Most of the factors can, however, be traced back to weak and ambiguous policy frameworks. The sooner there is a clear policy regarding the cryptocurrency industry, the sooner the market can pick up its pieces and rally to record highs again.