Although we’re already nearly a month into the new year, in the world of finance, cryptocurrencies and regulation it appears that 2021 is only just getting started.
A number of key events have taken place over the last week that are setting the tone for what to expect politically and economically as the rest of the year unfolds.
Today, we’ll be taking a look at what recent events in the Bitcoin market mean for cryptos and other key investment assets in the short, medium and long term.
Bitcoin
Last Thursday, Bitcoin experienced its most dramatic price drop in around 10 months, and it has since been struggling to find support around $32,000. The reason? There are two immediate ones:
- Joe Biden’s nominee for Treasury Secretary Janet Yellen made the claim that lawmakers should “curtail the use of Bitcoin” during her confirmation hearing on Tuesday, claiming that the cryptocurrency facilitated criminal activity. The prospect of a tougher regulatory stance on Bitcoin from the new administration is definitely not music to the ears of Bitcoin holders.
- A report – since debunked – from BitMEX research, which claimed it had detected what could have amounted to a “critical flaw” in the very technological architecture of Bitcoin, which is what makes Bitcoin so resilient and attractive. According to the report, this flaw had allowed a dreaded “double-spend” event to take place, whereby a Bitcoin holder could spend the same Bitcoin twice. Although the reported amount – which has now been attributed to an “RBF Transfer” that involves an unconfirmed transaction being replaced by a higher paying fee – was worth around US$ 21, the rumor was enough to send Bitcoin holders into a panic sell.
So what’s the takeaway? We already knew that cryptocurrency prices are extremely volatile, so these kinds of fluctuations should not come as a surprise. However, the reasons for the recent drop point to a deeper problem with looking at Bitcoin as a form of “digital gold” that will essentially only grow in value over the long-term.
We can call these two vulnerabilities the “Architecture Problem” and the “Regulatory Problem”.
The Architecture Problem does not refer to the integrity of the technological architecture of the Bitcoin blockchain – which so far has proved to be highly resilient to manipulation.
Instead, it refers to the issue of Bitcoin’s – and indeed all cryptocurrencies’ – reliance on the existence of a digital system – the internet – in order to have any transactional value whatsoever.
This reliance means that although cryptocurrencies might bring enormous gains, and may very well continue to grow in value for a long time, they can never match the resilience of physical gold, which can be bought and sold online, through the post, or by hand. Bitcoin will always be a slave to the technology that makes its ownership and trade possible.
Added to that, Bitcoin is also a currency with no inherent value. Just like most fiat, it is not tied to anything physical. This means that in all likelihood, it will follow the same pattern exhibited by practically every other currency in history, which is a trajectory towards a value of 0 in the long run. When that will happen is anyone’s guess, but the fact that it will eventually is indisputable.
Second is the Regulatory Problem. When Bitcoin first emerged in 2009, its extreme decentralization and anonymity provided global financial regulators with a real headache. How were they going to be able to control this new currency, which didn’t use the existing global financial network, had no Head Office, CEO or even a register of users like a bank would?
The answer to that problem has been a long process of expanding regulations that have focused on the main conduits of cryptocurrency transactions: the exchanges.
The global regulatory agency the Financial Action Task Force (FATF) has spearheaded the global push to regulate cryptocurrencies by drafting ‘Recommendations’ – which are in fact pretty much strictly-enforced rules that national regulators need to adopt if they don’t want their country to be blacklisted by the powerful agency. From June 2019, the FATF rules stipulate that Virtual Asset Service Providers (VASPs) – which are essentially any company that provides services related to digital and cryptocurrencies – need to comply with the same rules on data gathering and sharing as traditional financial institutions such as banks.
What this means is that most cryptocurrency users need to provide verified Know Your Customer (KYC) data to the crypto exchanges they use for transacting with, and that exchanges need to report transactions that occur on their networks that are over a certain threshold – which right now is around US$1000 for most jurisdictions.
Many banks also simply refuse to facilitate transactions with VASPs, which can be a problem, unless you have a crypto-friendly bank account. I had this problem myself when trying to purchase some Bitcoin earlier in November, when my bank that had previously allowed crypto transactions blocked the purchase, and even took the time to call me to quiz me over previous deposits in my account.
This led me to search for a new crypto-friendly account; a process which we’ll be detailing in an upcoming Member Report on Private Banking. That report will also cover how to set up offshore, private bank accounts suited for a wide range of purposes and individual situations.
But first, back to cryptocurrencies and regulations. The regulatory net has definitely been cast over the previously autonomous crypto ecosystem. For many VASPs and crypto advocates this is actually viewed as a positive, because it provides a pathway for cryptos to enter the mainstream and enjoy wider adoption and usage. However, being ensnared in the regulatory net also means that crypto exchanges and networks will be at greater mercy to the regulatory whims of governments and international regulators.
While most developed economies have been taking a “regulate and see” approach to cryptocurrencies so far, it is not far-fetched to imagine a time in the not-too-distant future when the authorities in the world’s most powerful economies get together and decide that cryptocurrencies are a threat to their plans for pumping cheap money into their economies through negative interest rates. It is not unreasonable to assume that once they fully embrace this strategy, they begin making the ownership or trade of cryptos more difficult, expensive, or outright illegal, in the type of globally coordinated way that would make it possible.
Although this is definitely not a certainty – and the crypto market may very well continue to boom – the threat is there and it should definitely be considered as growing so long as governments eye enormous stimulus packages – like Joe Biden’s planned $1.9 trillion injection – as the way out of the current global economic crisis.
As we’ve said in the past – the only way that Central Banks will be able to get away with these huge injections of cash into the economy – and to encourage individuals and institutions to spend and invest more of it than they save – will be through instituting negative interest rates that will charge bank depositors to hold cash in their accounts.
This process will be accompanied by a restriction or outright eradication of physical cash (that could otherwise be hoarded), and we can reasonably expect a greater constriction of the ability to use non-governmental crypto as a store of value to also be a part of such a strategy.
What this all means is that cryptocurrencies may definitely bring short term gains, but their viability as a secure store of wealth is still very far from certain: as such we still consider physical gold to be the best place to store wealth for quick liquidation in the future.
However, when it comes to a hard asset that provides income, a return on investment and a store of wealth, there is only one that ticks all the boxes: Agriculture. And that’s the reason we’ll be focusing on Agriculture for our next Members’ Report, due for release next month.
We remind our readers that an annual membership with Q Wealth is still being offered at just $5, as we are still working on website upgrades and a completely-revamped membership area and offering. We thank our members for their patience while these changes are made, and believe that you will be satisfied that the wait was worth it once we launch the new product.