The “Siege” of Bitcoin

With regulations still in place, the virtual currency market has become a haven for speculation.

This year’s “Bitcoin Pizza Day” was a mix of sadness and happiness for the cryptocurrency community.

In celebration of American programmer Laszlo Hanyecz buying 2 pizzas for 10,000 bitcoins in 2010, completing the first ever physical bitcoin transaction, the cryptocurrency community decided to celebrate by eating pizza on May 22nd every year.

Just a few days before the holiday, China, the United States, Russia and other countries or regions launched heavy regulatory policies on cryptocurrencies, and digital currencies such as bitcoin and ethereum saw double-digit declines after escaping from Musk’s “heavy-handed” attack. Under the regulatory siege, the price of bitcoin has fallen more than 30% over the past week, and is directly down from its all-time high of $64,788.34 in April of this year.

The "Siege" of Bitcoin

Satirical tweets from “Powell” on Bitcoin Pizza Day: Here’s what cryptocurrency bigwig Pomp’s pizza looks like

Many institutional investors, the main driving force behind this round of bitcoin, began to lose money last week. Tesla’s position cost around $35,000, with later entrants like Nexon and Meitu holding positions costing as much as $50,000. The erratic “godfather” of cryptocurrency, Musk, is reaping what he sowed.

But on Monday, Bitcoin came back to life, rising nearly 18% in the last 24 hours, with the price returning to above $39,700 at the close of the U.S. stock market.

Many investors are convinced that this round of the bitcoin market is unlike any other.

A much larger global central bank deflation than ever before has eroded the credibility of sovereign currencies like never before. U.S. policy rates, which had barely recovered from the zero rates of QE in 2008, dropped to zero again after the epidemic, while the Japanese and European central banks slid all the way into negative rates early on. With interest rates irreducible, the Modern Monetary Theory (MMT) idea of monetizing fiscal deficits to stimulate the economy took off – the government could issue unlimited debt and have a central bank print unlimited money for purchases, thus financing the fiscal. The government’s local currency debt will never default, no money to pay? The central bank can just print some more money.

What many people felt during the subprime crisis was once again reinforced, that central banks cannot be trusted – printing money keeps fiat currencies like the dollar devalued, and ordinary people are trapped in the existing financial system.

In the cryptocurrency space, they have found a “fair enough” way to get rich. It’s closer to a “free market” than anywhere else, with no disparate information and instrument disadvantages between retail and institutional investors, hundreds of times the leverage, and no stop-and-go or meltdown mechanisms.

“The difference with the 2017 bitcoin bubble is that this time institutions are in.” Matt McDermott, head of digital assets at Goldman Sachs Global Markets, said institutions are driven by two factors: negative interest rates and general concerns about asset devaluation, and the potential of bitcoin as a payment method.

As an investment asset, bitcoin has been added to the balance sheet of institutions such as BlackRock and Ark Investments in this “institutional bull” market, and is being used as a cash investment by public companies such as Tesla. According to Larry Fink, chief executive officer of BlackRock, cryptocurrencies could morph into “a great asset class”.

As a potential “alternative payment method,” companies like Tesla have pushed for this attribute by claiming to support bitcoin payments (though Musk quickly backtracked).

The institutional “regulars” saw, or rather, summoned up the “digital gold” properties of Bitcoin because of the need for logical justification for the investment. Even former U.S. Treasury Secretary Lawrence Summers had to admit that cryptocurrencies offered an alternative to gold for those seeking “government-independent” assets.

The water level of the game was raised at once.

The total market capitalization of the cryptocurrency market has accelerated dramatically this year from the billions of dollars in 2013 to more than $2 trillion, surpassing the total amount of cash in circulation in U.S. dollars. According to NEWSWEEK, at least 46 million Americans hold bitcoin, a population that represents about 17% of the adult population.

That’s already a market that no one can ignore.

But the way things are going, the logic of this bitcoin market isn’t any more solid. The bubble burst in a gesture of déjà vu, both collapsing when institutional acceptance reached new highs – the peak bitcoin price in the last round of the market in late 2017 occurred when the Chicago Mercantile Exchange (CME) launched bitcoin futures; and bitcoin reached a peak of $65,000 in April this year, just as the Coinbase, the number one “digital currency exchange”, went public.

There is another déjà vu: in the first half of the virtual currency bull market, bitcoin gains were ahead of the curve; and when the market spread, other high-yielding digital coins dramatically outperformed bitcoin, and leverage intensified on the floor, it meant the second half was upon us.

And keen institutions have been moving for a while. Expectations of the Fed tightening the tap have led institutions to cut back on risky assets. JPMorgan notes that institutional investors appear to be shifting back from bitcoin to traditional gold.

If monetary liquidity expectations are the momentum that keeps building, regulatory factors exert that force directly.

“It’s not at all surprising.” Marion Laboure, macro strategist at Deutsche Bank, wrote in a May 20 report, “As cryptocurrencies begin to compete fiercely with conventional and fiat currencies, regulators and policymakers will launch a severe crackdown.”

01 Government Concerns
In just the past week, various levels of Chinese government agencies have been “hitting hard” on cryptocurrencies.

The Financial Stability Development Commission of the State Council said it would “strengthen the supervision of financial activities of platform enterprises, crack down on bitcoin mining and trading practices, and resolutely prevent the transmission of individual risks to the social sector.”

The Internet Finance Association of China, the China Banking Association and the China Payment Clearing Association jointly issued the “Announcement on Preventing the Risk of Speculation in Virtual Currency Transactions,” which requires relevant institutions not to conduct any business related to virtual currency, including services such as registration, trading, clearing and settlement for virtual currency, and using virtual currency as the investment underlying for trusts, funds and other investments.

The Inner Mongolia Development and Reform Commission said that the regulation of “mining” will continue to be high pressure.

In the last round of policy retreat, virtual coin trading and speculation has been completely blocked in the country, and the speculative market, which once accounted for 90% of global bitcoin trading volume, was cleaned up. Yet China’s presence in the entire cryptocurrency chain is still not insignificant. According to Fortune magazine, Chinese miners contribute about two-thirds of global mining output. And coal accounts for about 60 percent of China’s energy mix, and some parts of the country have been warning of power supply gaps and high energy consumption by mines since this year, which goes against recent national policies such as carbon neutrality.

As for regulation on a global scale, the risk point of virtual currencies such as Bitcoin is not only in its hidden properties combined with criminality, but also its knock-on effect on the entire financial market.

The European Central Bank has dropped a grenade directly on the cryptocurrency market. In its Financial Stability Review, the ECB compared the surge in cryptocurrency prices in recent months to the “tulip mania” and the South China Sea bubble, arguing that bitcoin is “risky and speculative,” has a “large carbon footprint” and may be linked to “illegal” activities.

The latest case occurred just a short time ago, when hackers hijacked a pipeline supplying 45 percent of the U.S. East Coast with fuel and held Colonial Pipeline to ransom, triggering widespread gas shortages. The hackers escaped unscathed after the company paid the ransom in cryptocurrency as requested.

This innovation, seen as an alternative means of payment to the U.S. dollar, is not very useful when it comes to purchasing legitimate items, but is surprisingly effective in enabling extortion. Cryptocurrency security firm Chainalysis estimates that merchants received $2.8 billion in crypto payments last year, less than in 2017; in contrast, illicit entities received $4.9 billion, a 75 percent increase over 2017.

U.S. Treasury Secretary Yellen has expressed her dislike of bitcoin more than once: it is often used for illegal financing, its application is inefficient and highly speculative, and investors should beware.

In terms of the current level of institutional involvement in bitcoin, Federal Reserve officials do not believe that the decline in cryptocurrencies will disrupt the entire financial system. The European Central Bank has also said that “current financial stability risks appear to be limited” because crypto assets are not widely used for payments and because financial institutions in the region have “minimal exposure” to them.

But it’s clear that bitcoin has become notoriously permeable to the financial system.

According to Soren Willemann, a credit analyst at Barclays, bitcoin’s turmoil last week sent European corporate bonds plunging. “To some extent, cryptocurrencies are correlated with stock weakness in tech companies (especially Tesla), which is critical for European credit markets. That said, we will be the receivers of the falling crypto market.”

While the U.S. does not ban cryptocurrency trading, regulatory tightening on cryptocurrencies is on the way.

On May 20, the U.S. Treasury Department said it will require single cryptocurrency transactions of $10,000 or more in equivalent value to be reported to the IRS. According to the Treasury Department, “cryptocurrencies have posed a significant detection problem due to their widespread promotion of illegal activities, including tax evasion.”

Michael Hsu, the new acting director of the Office of the Comptroller of the Currency (OCC), said that upon taking office, he will begin a review of key regulatory standards and matters pending before the agency, including letters of interpretation and guidance regarding crypto and digital assets.

In another noteworthy development, several central banks, including the Federal Reserve, are developing their own digital currencies at a time when China’s officially released digital currency has begun testing.

In fact, Bitcoin’s decentralized “cryptocurrency” properties are not at all evident at the practical application level, and the above policy moves point to a deeper question: who has the authority to issue money?

This is a long-standing question in economics. Libertarian economists like Friedrich Hayek would favor a private solution to this problem, while most have long advocated the state’s prerogative to issue money to ensure the effectiveness of monetary and economic policy.

In a report dated January 15, 2021, UBS predicted that price winners of existing cryptocurrencies would go to zero if regulatory attitudes toughen or a better-designed digital currency emerges.

02 The inherent contradiction
Bitcoin has a powerful antinomy, an ability to self-actualize. Whether it goes up or down, there will always be a segment of the population that firmly believes that bitcoin will continue to rise. This paranoid belief is even somewhat “religious”.

Last week’s plunge was triggered by multiple factors, and the total market cap of cryptocurrencies has plummeted from $2.5 trillion to $1.5 trillion. Yet in the cryptocurrency community, there are loud declarations of faith in addition to cries of relief. To this segment, last Wednesday’s plunge was a huge victory and may well be seen as one of the most glorious anniversaries in the history of cryptocurrencies. The system is functioning properly under extreme pressure.

Another view is that there are positives to limiting cryptocurrencies, as it provides the institutional safeguards needed to become a legitimate digital currency or digital gold. The more mature the regulatory framework, the more capital the market can attract and the more upward momentum there will be.

The consensus is still not dissipated. That belief was self-fulfilling last Thursday and again this Monday, driving bitcoin’s stubborn rally higher and refusing to accept the momentum of the end of the feast.

So the question now is, how long can this consensus of belief last?

Ark Capital’s (ARK) “Cathie Wood” cried out during last week’s dramatic market swings, insisting that bitcoin will rise to $500,000. In the 2021 Big Ideas annual report, Ark Investments mentioned that if all S&P 500 component companies allocate 1% of their balance sheets to bitcoin, bitcoin will rise by $40,000 per unit; if the allocation ratio reaches 10%, it will rise by $400,000; if institutional investors allocate 6.55%, bitcoin will rise by $500,000.

Bitcoin should stop rising.

But that’s what’s scary, and reflects the inherent contradictions of cryptocurrencies.

Bitcoin does not belong to any sovereign state, and one of its investment values is its independence from central banks and other institutions. Yet it has become the market most vulnerable to manipulation by individuals on social media.

In addition to its star fund manager, Sister Wood, Musk, an entrepreneur, is also a master manipulator with incredible influence, including but not limited to his sudden “change of heart” to cancel Tesla’s bitcoin payment method and his contradictory and ambiguous statements on whether Tesla is liquidating/selling its bitcoin position. The market value of bitcoin and dogcoin fluctuates with every smile.

“Currently, there is no regulatory framework for trading in these crypto assets at either the SEC or the Commodity Futures Trading Commission (CFTC),” said SEC Chairman Gary Gensler, speaking to Congress earlier this month, “and in fact there are no protections against fraud or manipulation.”

Contrary to Bitcoin’s purported “decentralized” nature, Bitcoin’s positions are actually highly concentrated. According to crypto analytics firm Glassnode at the end of last year, only 4.2 million bitcoins are regularly liquid, and about 78 percent of mined bitcoins are illiquid or even illiquid. This is analogous to the stock market, which resembles a “sit and go” structure with a high concentration of equity.

There is no “center” in the Bitcoin distribution system, but there is a center in the pricing system. The world’s cryptocurrency supporters have united under Musk’s tweet to form a “consensus” designated by Musk. And this “consensus” can flow from one cryptocurrency to another as Musk’s arm points. It flows from one cryptocurrency to another.

“Crypto-digital currencies are a combination of libertarian nonsense and technological scams.” So said Nobel Prize-winning economist Paul Krugman in his commentary “Technobabble, Libertarian Derp And Bitcoin,” published in the New York Times last week.

In Krugman’s view, Bitcoin is a “Ponzi scheme” that tells a story of “Bitcoin represents a new world” on top of the story of “earlier players who have already made money,” but the question is how much economic value that story can support.

This is another paradox of Bitcoin, which has not played a role in real economic activity in the more than 20 years since its birth, except for illegal transactions.

Ark Investments mentioned in a previous report that the realized capitalization rate has hit an all-time high during bitcoin’s rise, a metric change that implies that early investors have taken profits and new entrants are picking up the slack at a high level.

SEC Chairman Jansler said that while understanding why people are investing in bitcoin, “stronger investor protections are needed before broader regulation of bitcoin can take place.”

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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