Wall Street is in the midst of a cryptocurrency craze. In recent months the value of virtual currencies has surged to $459 billion as investors have taken a flier on controversial digital coins such as bitcoin whose value is 26 times more volatile than the S&P 500. Bitcoin’s price was at $10,500 on Tuesday.
A Cryptocurrency Craze
But that price has swung wildly after hovering as high as $20,000 before Christmas as market makers threw their considerable weight behind bitcoin. That pricing pressure seems destined to be maintained as global regulators begin to clamp down on what they claim is a “speculative” asset class with no real value beyond what a buyer is willing to pay for it.
Wild Price Swings
That pressure has risen over the past week as the British government launched an injury into cryptocurrencies and the technology behind them — blockchain. The Treasury Committee of lawmakers said it wanted to understand the risks and benefits of digital cash following the explosion of investment in them.
Bitcoin trading activity has surged since bitcoin futures contracts were launched by leading exchanges such as CME Group. Market activity was so buoyant that at one point in December, the sheer volume of transactions involving bitcoin forced crypto exchanges to shut out new users because they could not keep up with demand.
A Bitcoin Bubble?
Last year’s rapid rise and fall of bitcoin led to suggestions that a “bubble” was forming, while other market commentators dismissed cryptocurrencies as fraudulent “Ponzi” investment scams and a vehicle for criminals and tax dodgers. Warren Buffett, the legendary stock-picker, claimed the crypto-craze would “come to a bad end”. The bosses of Goldman Sachs and JP Morgan claimed bitcoin was a vehicle to commit fraud and other crimes.
But investors see a value in the rails upon which bitcoin runs. The blockchain is a distributed ledger technology that records and verifies chains of transactions. It has potential uses in everything from clearing international remittances more quickly to slashing banks’ back-office functions and speeding up the transfer of critical medical records.
Nicky Morgan, chair of a British government committee, said: “People are becoming increasingly aware of cryptocurrencies such as bitcoin, but they may not be aware that they are currently unregulated in the UK and that there is no protection for individual investors.
“The Treasury Committee will look at the potential risks that digital currencies could generate for consumers, businesses, and governments, including those relating to volatility, money laundering, and cyber-crime.
“We will also examine the potential benefits of cryptocurrencies and the technology underpinning them, how they can create innovative opportunities, and to what extent they could disrupt the economy and replace traditional means of payment.”
Cryptocurrency Clamp Down
Nevertheless, the UK Treasury is planning to clamp down on bitcoin to prevent the facilitation of financial crimes and the laundering of money by cyber criminals. According to reports in The Guardian, the Treasury is mapping out legislation that would force cryptocurrency traders to reveal their identifies in some cases under existing anti-money laundering and counter-terrorist financing laws.
The planned legislation came as a UK police force warned that drug dealers were using cryptocurrency ATMs to store the proceeds of their crimes via litecoin and ethereum.
At this year’s Davos UK Prime Minister Theresa May told Bloomberg: “We should be looking at these [crypto-coins] very seriously, precisely because of the way they can be used, particularly by criminals. It’s something that has been… increasingly developing. I think it’s something that we do need to look at.”
Bitcoin could be “Systemically Important”
Philip Hammond, the Chancellor of the Exchequer, added: “I think we should be cautious about bitcoin and possibly we do need to look at the way we regulate this environment before the amount of outstanding bitcoin becomes large enough to be systemically important in the global economy.”
And it’s not just the UK that is placing cryptocurrencies in the crosshairs. Steven Mnuchin, the US Treasury Secretary, said at Davos that America wanted the world to have the same regulations it does, which he said hold bitcoin wallet holders to the same standards as banks.
He added: “My number one focus on cryptocurrencies, whether that be digital currencies or bitcoin or other things, is that we want to make sure that they’re not used for illicit activities.”
Global Regulation Looms
The US’ Commodity Futures Trading Commission has sent subpoenas to a major bitcoin exchange and Tether, a widely traded cryptocurrency, according to Bloomberg. In Asia, South Korea has sought to ban anonymous cryptocurrency trading.
Christine Lagarde, managing director of the IMF, said at Davos that the fund had already begun “monitoring, surveilling and analysing the risks associated with the development of cryptocurrencies and the potential benefits out of it”.
She said that the lack of transparency in cryptocurrencies’ transactions “conceals and protects money-laundering and financing of terrorism and all sorts of dark trades”, which she said was “just not acceptable”.
Analysts Poised for Further Price Falls
Analysts believe regulatory commentary is largely behind bitcoin’s recent fall, though the price is still up significantly on the same time last year ($900 in January 2017). When crypto-coin bitcoinnect announced an investigation into its coin had begun, the price fell from $440 to just $6.
Citi claims the current rout could see bitcoin’s value halve to $5,000 in a matter of weeks. It’s unclear whether that prediction will come true, but with lawmakers trash-talking cryptocurrencies daily, investors should brace for an even bumpier ride.