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Crypto Goes Up and Down, But Is It Getting Anywhere? - BLOOMBERG

NOVEMBER 29, 2019

By Olga Kharif


Bitcoin followers have seen this movie before: In the first half of 2019 Bitcoin soared again, more than tripling in value before sliding by more than 40%. What was new this year was that Bitcoin, the original cryptocurrency, had to share the spotlight more than ever before, as bankers, regulators and crypto’s true believers debated the merits of Facebook’s proposed Libra digital coin. As the dust settles, investors and regulators find themselves still grappling with the question first raised when Bitcoin broke into public consciousness six years ago: Are cryptocurrencies the future of money? And a new one: If so, what kind of coin will catch on?

1. Why has Bitcoin’s image tarnished?

You mean, why did legendary investor Warren Buffett call it “rat poison squared”? There’s a long list of reasons. Besides the massive price swings, Bitcoin and other cryptocurrencies have been connected with scams, money laundering, tax evasion, cyberthefts, excessive speculation and more. Risks like these may have been easier for regulators to overlook when Bitcoin and its peers sat on the far fringes of finance, but they are moving ever closer to the mainstream, particularly in crypto’s newer forms.

2. What are those?

The most prominent are called stablecoins -- digital currencies whose value is usually pegged to some other store of value with limited volatility. The biggest is Tether, whose creators say it’s designed to track the U.S. dollar. Libra has been described as a stablecoin, one that Facebook says could let more than a billion of the world’s unbanked make transactions online. Libra’s potential scale raised concerns among regulators that such a cryptocurrency could take power away from governments and central banks. JPMorgan is implementing its own stablecoin for transactions between its customers, an approach being investigated by other banks without setting off the kind of alarms that Libra has.

3. Why has 2019 been so rough?

Bitcoin is still up for the year, which has been full of dramatic highs and lows -- often tied to the same news. Chinese president Xi Jinping announced support for the digital ledger technology underlying cryptocurrencies known as blockchain, for example, leading to a market rally; but his government had, at the same time, cracked down on crypto businesses. Facebook’s Libra announcement led to a rally, as investors celebrated that crypto would spread faster and farther, only to be followed by a major slide, as regulators began questioning whether the token should be allowed to exist. Also contributing to volatility, most crypto exchanges are increasingly offering futures and options and margin trading, letting investors borrow as much as 125 times more than what they put down. As a result what starts as a flurry can turn into a blizzard. When prices tumble, investors who bet wrong may face liquidations, driving prices down further.

4. How are regulators responding?

Their approaches have run the gamut, from a largely hands-off system in Switzerland to the toughness of China, which banned crypto-asset exchanges in 2017 and blocked access to overseas trading platforms. Most countries, notably the U.S., are in the process of formulating a comprehensive regulatory strategy. U.S. prosecutors are investigating manipulation of the price of digital currencies. New York Attorney General Letitia James in April began a case against crypto exchange Bitfinex, claiming it hid the loss of more than $850 million of client and corporate funds. Soon after the Financial Action Task Force issued new rules that most countries around the world will follow to crack down on money laundering and terrorism financing using virtual assets.

5. So, what’s the current view of what cryptocurrencies are?

It’s still far from clear, as is what role they might eventually play in the financial system. Born out of the bitterness that followed the 2008 financial crisis, Bitcoin and its imitators aren’t bills or coins printed or policed by a government or bank. They’re electronic assets created and monitored by a community of users acting in a decentralized way. The vision behind Bitcoin laid out in a 2008 pseudonymous manifesto promised that no more than 21 million will ever be created. That means it’s sometimes compared with scarce commodities such as gold, where the value is determined solely by what people are willing to pay. But some crypto-assets have characteristics of stocks, such as shared ownership in a common endeavor and initial offerings of shares to the public. In the U.S., the Securities and Exchange Commission opened a broad probe into whether entities running so-called initial coin offerings are violating rules by offering what are really securities, and it has been fining and shutting down violators since. China has banned ICOs entirely.

6. Who still believes in crypto?

That depends on whether you’re talking about “traditional” crypto like Bitcoin, or the newer flavors like the stablecoins being developed by Facebook and JPMorgan. Bitcoin’s appeal may have peaked during its bull run of 2017, when it attracted many mom-and-pop investors. Many of them have since left, burned by the crash of 2018 and Bitcoin’s continued price volatility. Institutional investors are still on the sidelines. But there’s a strong core group of enthusiasts remaining: Hackers drawn by a disdain for authority and the libertarian aspirations behind Bitcoin’s creation. Technology geeks who believe they’re disrupting the marketplace and getting in early on the next chapter in the history of money. The biggest force in crypto today, though, are speculators -- enticed by the promise of soaring gains and willing to brave the danger of steep losses.

7. What about stablecoins?

Just as blockchain technology has attracted adherents who never wanted anything to do with Bitcoin, stablecoins have drawn the interest of central bankers around the world, a group not usually seen as cutting edge. They’re exploring whether new payment systems can be built on government-issued stablecoins -- and whether Facebook’s plan for an independently issued stablecoin could be so popular as to undermine their own monetary regimes.

The Reference Shelf

  • An article explaining the New York AG’s case against crypto exchange Bitfinex.
  • An article explaining Facebook’s Libra, and its potential impact on banks.
  • The original white paper outlining Bitcoin’s protocols.
  • A QuickTake on Bitcoin and the blockchain.


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