There are more swings in the value of Bitcoin than in The Planet of the Apes, yet there’s no denying that the cryptocurrency is a wealth machine. It has turned regular folks into millionaires and millionaires into billionaires. How can you not be bullish on it?That is my gut reaction. But as responsible investors, we must ask responsible questions, such as: Why is Bitcoin dropping?If answering that gives us clarity on Bitcoin’s fair value, then it is worth the mental exercise. Besides, it’s simply good practice to review your prior beliefs every so often.Until now, Bitcoin gathered steam while operating under the radar. Governments either dismissed Bitcoin as a passing fad or else did not understand the threat it posed to their existing frameworks. But those days are numbered.New rules are being discussed across the world, which is causing a lot of uncertainty in the Bitcoin price. Rules that are friendly to Bitcoin send its price surging; rules that are less friendly have the opposite effect. You don’t have to be a rocket scientist to figure that out.The worst part is that Bitcoin sometimes moves at the mere suggestion of new legislation. It is a highly volatile asset, which in turn sheds doubt on its ambition to become a currency. Currencies are supposed to preserve value from one day to the next.Users have no assurance of stability with Bitcoin and that is why its price is dropping.
Let’s run through some of the news that is affecting Bitcoin.
For one, the New York State Department of Financial Services, or NYDFS, is putting digital currency startups under the microscope. Here’s an excerpt from its filing:
“DFS has begun examinations of these virtual currency companies, which, like other regulated financial services entities, are subject to periodic examinations by DFS.”
(Source: “New York’s Financial Regulator Is Now Inspecting Bitcoin Startups,” CoinDesk, June 20, 2017.)
It is a mild statement, devoid of venom, yet investors get jumpy at the idea of heightened scrutiny. Most are aware of a few rotten apples in crypto-land. They don’t want the entire community to be tainted by association, hence the retracement in Bitcoin prices.
In other news, the International Monetary Fund (IMF) is starting to take Bitcoin seriously. A staff discussion note was released this week, raising concerns about Bitcoin’s currency ambitions.
“The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy.” (Source: “IMF Explores ICOs and Central Bank Coins in New Blockchain Note,” CoinDesk, June 20, 2017.)
In my opinion (and apparently the IMF’s, too), this is Bitcoin’s soft underbelly. Namely, that it wants to become the first global currency. I have said time and again that this ambition puts Bitcoin in the firing line of regulators.
If you’ve ever read IMF recommendations before, you’ll know exactly what I’m talking about. After rambling on about this and that, the IMF eventually returns to its standard prescription: Print money and call me in the morning.
Naturally, it would be concerned about an emerging technology that threatens a country’s ability to print its way out of an economic crisis.
There have also been some moves to regulate cross-border payments. Congress put forward a bill in May entitled the “Combating Money Laundering, Terrorist Financing and Counterfeiting Act of 2017,” which would force people to declare any crypto-funds coming into the country. (Source: “Forfeit Your Bitcoin? Congressional Bill Draws Fire Over Border Check Rules,” CoinDesk, June 19, 2017.)
The bill is unlikely to pass, but once again, the mere suggestion of it can spook investors.
While the emergence of new rules about Bitcoin can theoretically hurt the BTC price, investors should wait until the dust settles. It’s possible that uncertainty is a bigger problem than any of these new regulations. One study actually makes this case.The study comes from Cathy Mulligan at Imperial College London’s Center for Cryptocurrency Research and Engineering. (Source: “Lack of Regulation Is Hurting Bitcoin in Many Regions: Study,” The Cointelegraph, April 20, 2017.)She argues that impractical, inconsistent, and insufficient regulations are at the root of Bitcoin’s problems.Using India and the U.K. as case studies, she points out that even sub-optimal regulations can lend Bitcoin the simple clarity it needs to explode. Whether or not you buy this argument, it makes sense to let these dynamics play out before doing anything drastic.
