A curveball on the regulatory front from South Korea has blown Bitcoin back down, with BTC – the Big Daddy of cryptocurrencies – slumping as much as 14% yesterday to around $13,500 before paring losses and rising back up to just shy of $15,000. Having raced towards $20,000 in recent weeks it is back below where it was trading in early December.
Slain? Overblown? A bubble? However, one looks at it even at today’s current level Bitcoin is still massively up from where it was in January 2017 – a month that saw it exchanging hands between $800 and $1,150 a pop. The price moves right now are all over the place.
While the latest swings are fairly commonplace given recent trading history, it is worth looking at whether this move by the South Korean authorities is simply another minor road bump to be sped over, or is something far more serious for the crypto boom.
Given that the country is one of the largest markets for cryptocurrencies – the world’s third largest crypto market – any ban would certainly impact demand. That said, while the initial news hit Bitcoin prices, it was tempered by subsequent reports indicating that South Korea may not actually be able to bring the required new legislation into force all that soon.
Reuters reported that Justice minister Park Sang-ki revealed in news conference that the government was preparing a bill to prohibit trading of the virtual currency on domestic exchanges.
But following the knee-jerk reaction on markets to the news, the country’s Presidential office later indicated that a ban on the currency’s digital coin exchanges has not been finalized.
The news agency stated: “Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.”
There was a sort of a feeling a few weeks before New Year that there would be a sell-off. You don’t have to be a rocket scientist – the graphs and simple gut feeling pointed to all the classic signs of a bubble.
As well as investors who were big into Bitcoin were coming out with all sorts of price projections – one told me they holding out for $50,000 before selling. Others – in the shape of friends who had never uttered the word cryptocurreny before were suddenly canvassing me daily for advice on where the digital currency was headed.
Frankly who knows where the price will be in a year’s time let alone next week or next month.
“We’ve seen South Korea get more nervous about the amount of speculation, but this “nuclear option” was a little surprising, particularly as there were reports this week that the country was seeking to work with Japan and China on crypto trading rules,” said Neil Wilson, senior market analyst at City of London brokerage ETX Capital, which offers trading in Bitcoin to clients.
As well as signalling that authorities are struggling to get a grip on how to regulate cryptocurrencies and are very nervous about the degree of speculation, Wilson added, “It is worth noting that prices in South Korea command a significant premium over other exchanges. It is not just South Korea – the global cryptocurrency landscape is marked out by regulatory (as well as price) arbitrage.”
In fact, in South Korea trades trades at around a 30% premium versus other countries. And, following the minister’s initial comments regarding a ban, the local price of Bitcoin declined by up to 21% in midday trading to 18.3 million won (c.£12,750).
The move by the authorities in South Korea comes as China quietly moves to end Bitcoin mining. Whilst this is relatively small in its impact on the market, it does serves to highlight how authorities are “tightening the loose”, as the London-based Scot posited.
This Chinese move follows a clampdown on exchanges for trading cryptocurrencies in country and efforts aimed at Initial Coin Offerings (ICOs).
Last month I referred on Forbes to a looming “regulatory crunch” for Bitcoin along with the wider cryptocurrency market. “The South Korean developments support the argument that governments will gradually but inexorably squeeze cryptos,” according to Wilson.
Forced back underground, cryptocurrencies would still appeal to a narrow field of criminals and terrorists who wish to remain off-grid and off the radar. However, as the Scot argues it “would not support the investment thesis that is being touted at present.”
Though we have seen some mainstreaming with the launch of regulated futures markets with the CME and CBOE late last year, barriers to further inculcation into the investment community is providing harder. The U.S. Securities & Exchange Commission (SEC) has made it clear it won’t exactly roll over and allow Bitcoin ETFs (Exchange Traded Funds) any time soon.
Meanwhile, U.S. Senate Bill 1241 would require anyone dealing in Bitcoin – whether issuing, redeeming or cashing it in – to be classed as a financial institution.
As Wilson put it, “Once you start hammering not just the Bitcoin exchanges with AML, KYC and all the other regulation, but also every investor and user, there is not a lot of point to it – if there ever was.”
He added, “There is also clearly a seigniorage problem for governments that they will not tolerate forever. Governments do not just hand over the creation of new money to outsiders and the lack of regulation in cryptocurrencies, coupled with the high degree of speculation, threatens to do this.”
More broadly, the U.S. government in particular exerts huge control over not just global financial markets, but wields power in wider diplomatic, economic and military terms by controlling the supply of U.S. dollars and the financial networks.
“With this in mind it is not about to relinquish this to a handful of unidentified crypto enthusiasts, unless it has got a sizeable stake in Bitcoin itself of course,” he contended.
In short, it looks like the “light-touch” that has allowed the crypto-boom to explode might be coming to an end. Although it will take time and some will argue that is hogwash, there are a few “levers being pulled” that the ETX Capital analysts believes will “gradually squeeze cryptocurrencies and the investment case behind them.”