BLOG | February 05, 2018

Cryptocurrency Markets Falling as Governments, Banks Tighten Up

It’s getting ugly in the cryptocurrency market.

Bitcoin hit nearly $20,000 at its heady December 18th peak. But latecomers to the market have gotten a nasty shearing, with bitcoin prices falling to as low as $7,614 on Friday. We’ve seen a bit of a bounce back over the weekend, as bitcoin is selling for $8,335.52 as of 7:19 PM ET on Sunday, February 4th.

It did recover to over $9,200 on Saturday afternoon, but sellers took over again and the oldest crypto asset has fallen over 8 percent in the last 24 hours. Other major cryptocurrencies have also taken big nosedives, including Ripple, Ether, and Litecoin.

Markets are adjusting to a tighter regulatory environment in South Korea, China, the United States and Japan, which is still smarting from the theft of some $500 million from a hot wallet at Japanese firm Coincheck, Inc. And India, for its part, issued rumblings about banning cryptocurrency transactions outright, sending bitcoin markets tumbling even more last week.

Risk

Hopefully, the losses of the last six weeks will inject a bit of humility and a healthy respect for risk back into the market – because the cryptocurrency bulls were getting pretty obnoxious around that time. We observed that obnoxiousness as a classic sign of a market top, and even of the late stages of a speculative bubble. We weren’t wrong.

Nouriel Roubini of Roubini Macro Associates called bitcoin “The Mother of all Bubbles,” in a television appearance over the weekend. Those over 35 will remember the reference to Saddam Hussein’s confidence in his ability to defeat the U.S. Army and other coalition forces in a massive tank battle in the open desert despite overwhelming allied air supremacy. His arrogance led to a massive rout and the near-total destruction of his fleeing army along the what became known as the Highway of Death leading from Kuwait back to Iraq.

And we could still see that in the cryptocurrency market.

This week started off with some bad news: The cryptocurrency community has been hoping for some major retailer to start taking bitcoin or other cryptocurrency assets, and Starbucks – the company that led the way in enabling mobile app transactions at the register and mobile purchases for pick-up without a register transaction – was clearly on the short list.

But Starbucks Corporation Chairman Howard Schultz dashed those hopes, for the time being, dismissing hopes that bitcoin acceptance at the world’s biggest coffee chain was in the cards in the near future.

“The reason I mention this is not because I’m talking about Bitcoin because I don’t believe that Bitcoin is going to be a currency today or in the future, I’m talking about the new technology of blockchain and the possibility of what could happen not in the near term,” said Starbucks Corporation Chairman Howard Schultz. “I’m bringing this up because as we think about the future of our company and the future of consumer behavior, I personally believe that there is going to be one or a few legitimate, trusted digital currencies off of the blockchain technology.”

Facebook, too, has acted to ban cryptocurrency-related advertisements.



Banks Pulling Credit Support

Meanwhile, at least five major credit card issuers, J.P. Morgan Chase, Discover, Capital One, Citigroup and Bank of America, have moved to block customers from using their credit cards to make bitcoin purchases. The reasoning: they don’t believe customers using credit cards to speculate in bitcoin are a good credit risk.

You can still use debit cards – at least if you’re a Bank of America account holder. But the banks have just started blocking credit card transactions with known bitcoin/cryptocurrency exchanges.

The editors of Bloomberg also mention anti-money-laundering regulations as part of the banks’ motivation to cut off credit card access to cryptocurrency exchanges. It’s much harder to track and prevent money laundering once a customer converts dollars to cryptocurrency. But the banks were happy to let customers rack up debt to buy cryptocurrency all through 2016 when nearly everything attached to a Blockchain was booming until the very last two weeks of the year. Mastercard reports that its overseas transaction volume had increased by 22 percent in 2017 – fueled largely by cryptoasset transactions.

If the losses continue, lots of people who bought cryptoassets aggressively near the market high may be facing a cash crunch – and may not be terribly motivated to pay back the money they owe the card issuers.

Meanwhile, billionaire hedge-fund guru Mike Novogratz predicted that bitcoin would fall to $8,000 and Thomas Lee predicted that bitcoin would fall as low as $8,000 before finding a floor and beginning a recovery.

They’ll have to do it without credit card debt to fuel the speculation, but that’s probably a good thing.

Note: If you really really want to go hard, you can still get a cash advance from a credit card and then use that to buy crypto assets. But you’ll be paying a 3 percent transaction fee in most

cases and much higher interest rates when you do so. And if your bank figures it out, they’ll probably cut you off).

As we reported last week in this space, online broker Robinhood Financial announced that it would enable no-cost cryptocurrency trading. At least a million people have signed up for early access.

It’s going to be tough for India to withstand a major technological and economic innovation. I don’t expect a blanket ban to stick for very long. It appears that cryptocurrency markets may be overreacting to some bad news. But crypto-bulls have been overreacting to good news, and ignoring cautions for so long it’s difficult to identify a floor that would make for a rational buying point going forward.

Be careful out there!

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Crypto Markets Falling as Governments, Banks Tighten Up
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Crypto Markets Falling as Governments, Banks Tighten Up
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It's getting ugly in the cryptocurrency market, as Governments and Banks tighten up. Bitcoin hit nearly $20,000 at its heady December 18th peak. But latecomers to the market have gotten a nasty shearing, with bitcoin prices falling to as low as $7,614 on Friday.
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