Investors who jumped aboard the latest Bitcoin price rally have learned the hard way just how brutal investing in cryptocurrencies can be.
Bitcoin flew to an all-time high of almost $65,000 in April, but crashed below $32,000 on May 23, losing more than half its value from the peak.
So far, so Bitcoin. The cryptocurrency has been incredibly volatile for a decade, with quick-fire gains and losses all part of the fun.
Yet all this will come as a shock for more recent investors, who have not seen a crash in the past 12 months.
Stephane Ouellette, chief executive and co-founder of FRNT Financial, called it the first “welcome to crypto day” and said newbies had better get used to it. “The history of these assets has been littered with aggressive rallies and sickening sell-offs.”
With the price rebounding above $40,000 at the time of writing, crypto fans will tell you to buckle up and enjoy the rollercoaster. Yet the recent wipe-out wasn’t just a random event, there were clear, identifiable reasons for it.
Bitcoin and other cryptocurrencies now face two existential threats and investors need to know what they are.
First, blame Elon Musk. The crypto fan boy, serial tweeter and Tesla founder triggered the crash by reversing his February decision to accept Bitcoin as payment for his company’s electric cars, calling its energy use “insane”.
Tesla and Bitcoin were always a strange fit, given that the electric car maker is at the forefront of the clean energy revolution, while Bitcoin miners are fuelled by coal, and consume more power than Finland.
The second trigger was a regulatory clampdown initiated by the People’s Bank of China, which has banned banks and online payment channels from offering customers crypto services, although people can still hold them.
China's financial regulator hopes to curb speculative trading, maintain capital controls and encourage its population to embrace a digital yuan.
These threats come on top of previously known dangers, such as extreme price volatility, lack of regulatory protection, the threat from hackers and the fact that nobody has worked out what cryptos are actually for.
So how scared should investors be?
Mr Musk has said that Tesla will accept Bitcoin again, once it has cleaned up its act, but that won’t be easy. Sustainable Bitcoin is a long way off, although rival cryptos such as Ethereum, Cardano, Ripple and Stellar use less energy.
The Tesla reversal might scare off other corporates, as they already face increasing pressure from shareholders to meet environmental, social and governance (ESG) criteria, and facilitating crypto transactions will work against that.
The tide has turned, says Laith Khalaf, financial analyst at investment platform AJ Bell. “Tesla’s decision will give other companies the jitters about facilitating crypto payments, lest they spark an ESG backlash. The few companies that already accept Bitcoin may now be having second thoughts.”
Consumers and investors may steer clear, Mr Khalaf says. “Particularly younger Bitcoin fans who are also likely to be sensitive to climate issues. Celebrity endorsements may also dry up.”
Beijing’s hardline stance looks like the start of a concerted effort to limit the decentralised power of cryptocurrencies, Susannah Streeter, senior investment and markets manager at Hargreaves Lansdown, says.
“The US Federal Reserve has indicated that it wants tougher regulation, while the UK’s Financial Conduct Authority is warning investors they could lose all their money,” she adds.
The bigger Bitcoin gets, the tougher the regulators will become, Joshua Mahony, senior market analyst at online platform IG, says.
At its recent peak, the global crypto market was worth $2 trillion, and a crash could unleash “massive capital destruction”.
“With institutions taking a larger role in this latest bull run, the repercussions of another extended crypto-capitulation could be more widespread compared with 2018,” Mr Mahony says.
Article source : https://www.thenationalnews.com/business/money/is-the-latest-bitcoin-crash-the-end-or-just-another-beginning-1.1232138
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