By Millenial Investing
Bitcoin has bounced back from the recent China scare, but cryptocurrency investors should take notes — i.e. read the writing on the tea leaves.
The crypto bulls are rejoicing, where China (the world’s most populous country), nor JPMorgan (NYSE: JPM) (the largest U.S. bank), can keep Bitcoin down. China closed down trading of cryptocurrency by forcing cryptocurrency exchanges to return the money and close their doors. The same week, Jamie Dimon, CEO of JPMorgan, called Bitcoin a fraud. Bitcoin prices took a beating, falling from $5,000 to $3,000 in just a few days. Since then, Bitcoin prices, and other cryptocurrencies have rebounded nicely.
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
Most entrepreneurs and tech aficionados have brushed off the China shut down, already finding seeking alternatives by listing tokens on Hong Kong exchanges to raise funds. Hong Kong, unlike China, is following the United States’ lead when it comes to initial coin offering regulation. China is rolling ou the most severe crackdown on Bitcoin trading that we’ve seen yet, which could set the stage, and lay a framework, for other governments worried about losing monetary control.
For Jamie Dimon’s part, he did miss the mark. Bitcoin has the potential to provide a more stable currency than those printed by governments, as well as the ability for electronic trade between people that don’t know or trust each other, without a middleman. If anything, Dimon’s comments are about job security. Still, his skepticism is understandable.
A lot of Bitcoin bulls point to the fact that Bitcoin brings stability to emerging nations. But, in truth, most new buyers of Bitcoin that I see coming in are doing it because they think it’ll keep going higher – not because of the usability or blockchain, but they have a fear of missing out. Buying into something to make a lot of money is comparable to what we saw in the 2000 dot-com bubble. The majority of people I talk to are interested in buying into Bitcoin because they see it as a lottery ticket style opportunity, and many haven’t considered the biggest risk to Bitcoin.
This is the biggest boogeyman out there
The government is something that I think most cryptocurrency investors are overlooking. China lays the framework for why we should be considering regulatory risk in the context of cryptocurrencies. Governments can only stay on the sidelines for so long, especially as it loses more monetary control with Bitcoin gaining popularity. Not to mention the loss from illegal activities.
And as cryptos gain ground, there will be more fraud and hacks, which means louder cries for regulation. That is, the risk of the government stepping in has been mentioned in the media, but often gets shaken off by cryptocurrency investors, with the argument being that the only thing the government can do is hinder trading and not the usability of Bitcoin. That’s not entirely true.
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With the crackdown of Bitcoin in China, the worry is that Bitcoin is weakening the control of the country’s money supply. China wants to track the source and destination of every piece of money. China’s hard stance against Bitcoin shows that governments can’t regulate actual Bitcoin but can reach deep into many Bitcoin aspects. That is, governments can shut down and impact services and businesses that use Bitcoin, as they are in real locations where governments have control. There’s no reason that other countries can’t follow China’s lead, especially the U.S., where tracking money movements is a key priority of the government — think: preventing terrorism, drug trafficking, etc.
Consider this: Perhaps Bitcoin isn’t trading on fundamentals, with more and more people buying on the hope that prices will go higher. And sure, the few buying it for the decentralized properties have at least a thesis. But the likes of Napster and BitTorrent had big success from decentralizing – but regulation was big headwinds for both. Bitcoin is facing a catch-22, where, as the adaptability of Bitcoin rises there will be more uses and applications. However, with that, governments around the world feel the increasing pressure to figure out a way to track and control cryptocurrencies.
In my opinion, the regulatory risk is the biggest threat for Bitcoin, yet grossly underrated. Like what we saw with the China news, if regulation becomes apparent, Bitcoin prices can move quickly against investors. Investors should stay open-minded, but keep a close watch on what comes from the government, and take China’s moves as a warning.