Financial analysts have been ringing alarm bells over the perils cryptocurrencies could unleash for some time while Jay Clayton, the chairman of U.S. Securities and Exchange Commission (SEC) has recently added some perspective to the din around the contentious cryptocurrency that is Bitcoin. He said recently and we quote, "Bitcoin doesn't have the attributes of a security." Unquote.
Daniel Roberts, senior writer at Yahoo Finance quoted him on November 28, 2018 in a piece, and another story in express.co.uk took on a more dire tone since the world’s “leading digital asset”, Bitcoin that is, had hit its lowest value since September 2017 this month and was now sparking fears it could be more vulnerable to hacking from cybercriminals.
So yes, a shaking out is happening even as we speak.
This is Seetal and in today's Moneycontrol podcast, we will trace the Bitcoin story and its recent dramatic turns.
Many sides to the coin
But coming back to Clayton and his comment about Bitcoin that we opened this podcast with, this is how he elaborated his statement in the Yahoo.Finance piece, "An asset like Bitcoin, where it’s designed to be a replacement for sovereign currencies, we’ve determined that doesn’t have the attributes of a security. As far as I’m concerned, it’s designed to be akin to the dollar, the yen, the euro. And it operates that way. People who purchase it are expecting it to operate that way.” Unquote.
His statement, says the piece made the crypto people happy because of the obvious crackdown the SEC has exercised on companies that conducted ICOs (initial coin offerings) or “token sales” under the view that these sales were unregistered securities offerings. We quote, "Big Bitcoin believers would generally prefer less SEC regulation of the space, not more, and if the SEC does not view Bitcoin as a security, then it is not under its purview." Unquote.
The writer though differs with Clayton and does not think that Bitcoin is akin to the dollar, the yen or the euro or that it operates that way.
We quote, "The early vision of Bitcoin as a currency, and a legitimate alternative to fiat currency, has not really played out. Rather, many see Bitcoin as a store of value (“digital gold”); many see it as having a killer use case in emerging markets where people are under-banked or un-banked and need an easier way to get paid; and many institutions see potential in blockchain, the distributed ledger technology that underlies Bitcoin. But the places where you can actually spend Bitcoin are still few and far between." Unquote.
Sam Stevenson in express.co.uk was however more interested in the fall out of the recent slump in Bitcoin's value .
We quote him, "BTC nosedived in mid-November, dipping below $4,000 (£3,123) for the first time in 2018, according to CoinMarketCap. The price slump has caused cryptocurrency commentators to claim the market is more susceptible to hacking. Speaking to Express.co.uk, industry experts also raised the issue of the need for greater regulation within the crypto sphere.
Paolo Passeri, global solutions architect at Netskope, maintained the market-wide crypto price crash was the “catalyst” and driving force behind a recent spike in cybercriminal hacking scams." Unquote.
The crypto aficionado in the piece explained that the reason for cybercriminals’ emboldened stance was because the crash made crypto mining “less viable”.
He said: “The catalyst driving cybercriminals to find new kinds of attacks is the fall in cryptocurrency prices, as this has made crypto mining a far less viable means of obtaining the currency due to the power costs involved.
As the price volatility continues, hackers are aiming to capitalise on victims who have profited from the recent price bubble without expending too much resource to achieve their goals.” Unquote.
The point being that hackers look for loopholes and constantly reinvent ploys to steal cryptocurrency, as in the recent example of SIM Swapping used to steal $1million (£784,7000) in digital assets from a Silicon Valley businessman.
The cybercriminal was 21-year-old Nicholas Truglia, who according to the piece, impersonated the businessman by obtaining a new SIM from the victim’s operator, and then used the new number to pass through the phone-based authentication that provided access to crypto wallets.
The piece also cites economist Dr Saifedean Ammous who tweeted, “This bear market is a test for Bitcoin's security model: If the price continues plummeting while chip manufacturers continue to advance in making cheaper processing power, attacking Bitcoin becomes progressively cheaper.” Unquote.
How serious are the implications?
Peter Tchir, a Forbes contributor was almost brutal if we go by the headline of his piece published this month.
"Bitcoin - Stick A Fork In It - It's Done," is, you will agree, quite a punchline to begin a piece with.
But the intent of the piece was to inform, not to shock. A hard fork is in fact a term that relates to blockchain technology, and stands for a radical change to the protocol that makes previously invalid blocks/transactions valid (or vice-versa). This requires all nodes or users to upgrade to the latest version of the protocol software.
We quote from the piece, "As of November 15, Bitcoin Cash had a fork that briefly led to the creation of Bitcoin SV (SV stands for Satoshi Version) and Bitcoin Cash ABC. Bitcoin Cash has dropped from $511 on November 13 to $212 on November 23 (according to Bloomberg). Bitcoin SV which was $55 on a November 23 (according toCoinMarketCap) creating a combined value of under $270 (holders of Bitcoin Cash received 1 Bitcoin SV for every Bitcoin Cash they had at the time of the fork). Bitcoin Cash was briefly valued at $227.04 before mainstream price aggregator CoinMarketCap merged the prices into a single number." Unquote.
Even if you can't make sense of the convoluted goings on mentioned in the above statement, it is enough to know that while Bitcoin itself wasn’t affected by this fork, it has fallen from $6280 on November 14 to under $3,800 on November 26. And there were repercussions too because the fork triggered a wave of selling across all cryptocurrencies.
We quote, "This latest drop in price made many already awkward Thanksgiving conversations even more awkward. It isn't a total coincidence that the meteoric rise in Bitcoin to almost $19,000 in December 2017 started just ahead of American Thanksgiving as college students came home and explained the potential investment to their family and friends how to purchase it and why they needed to purchase it. Bitcoin futures were also due to be launched, giving Bitcoin bulls more reason to be bullish.
As of now, with Bitcoin under $3,800 you had to have purchased Bitcoin before October 2017 to have a profit. A year is a long time to have anyone who purchased an asset have losses (in US dollars). It certainly makes potential investors who were largely drawn to crypto by the fear of missing out (FOMO) very reluctant to commit capital to Bitcoin or any cryptocurrency." Unquote.
The reason for the decline
Peter Tchir believes Bitcoin, and the entire cryptocurrency space is too confusing for many potential investors. We quote, "These forks that have occurred and the variety of cryptocurrencies confuse too many potential investors. On my Bloomberg Terminal, there is a Cryptcurrency Monitor that shows Bitcoin, Bitcoin Cash, Dash, EOS, Ethereum, Ethereum Classic, Litecoin, Monero, XRP and Zcash. Which one to pick? Which one will win? How many casual investors will do the work to make that decision? Cryptocurrencies, which I think rely heavily on new users adopting it, scare away investors who think critical mass will be a key to ongoing success." Unquote.
Adding to the confusion is the 'decentralization' or lack of centralized control because as the piece states, " Decentralization makes it easy to create forks and to create new cryptocurrencies, adding to the choices and the confusion for many. Heck, the Wall Street Journal created their own mock cryptocurrency to demonstrate how easy it could be. These forks and new products diminish the power of the original Bitcoin and all cryptocurrencies as even avid investors have trouble keeping up, let alone someone just looking to dip their toe in the water. Sometimes 'choice' isn't a good as it is a sign to many, that the market is too fractured and too easily split to reach the full potential many crypto bulls tout." Unquote.
Can things get better?
The piece suggests that if Bitcoin itself (or any or all of the cryptocurrencies) can start trading higher and regain a lot of the lost momentum, then people would care again. We could see a return of FOMO which could see another wave of fresh adopters 'forced' into the market. We quote the writer, "I am not sure how to get back the traction that Bitcoin and cryptocurrencies had last year. Bitcoin and cryptocurrencies in general have lost their lustre, in part because they seem to be offering increasingly confusing choices, rather than harnessing investor demand and understanding." Unquote.Mixed signals
Along with many financial portals and observers, CCN also reported feverishly on the value of Bitcoin (BTC) dropping from $4,065 to $3,600, reversing a short-term corrective rally.
We quote, "The dominant cryptocurrency has been on a steep downtrend for several weeks but on November 26, for a brief of time, Bitcoin seemed to be initiating a corrective rally after reaching a new yearly low at around $3,400.Temporarily, Bitcoin spiked to $4,000, engaging in a 17 percent increase in price within a 24-hour period. However, the price of the asset began to fell back to the lower region of $3,000." Unquote.
And understandably, asks the piece, "What is Bitcoin up to?"
The explanation is simple. The cryptocurrency market, says the piece, is struggling to sustain any sort of momentum in an attempt to create a trend reversal. Sell pressure on major digital assets is increasing and buy pressure is declining, which has led both Bitcoin and Ethereum to drop by more than 40 percent in the past two weeks.
We quote, "When the price of an asset falls substantially without a huge spike in volume, it represents a free fall without much sell pressure. Which means as big sell volumes begin to the hit the market, the price of the asset could be vulnerable to additional sell-offs in the near future." Unquote.
We leave you with a statement by Alex Krüger, a cryptocurrency trader and economist, "Before the crash BTC had been growing exponentially. Will BTC ever resume exponential growth? Maybe not. Maybe only temporarily. Many assets don’t grow exponentially. What if Bitcoin has matured and starts behaving as a currency or most commodities?” Unquote.
The 'What it,’ is an interesting touch. It leaves answers open ended because in the end, cryptocurrencies are not meant to be predictable either. Just like those who invest their faith in their intangible allure. The Bitcoin story is obviously one with many possibilities.