Crypto: Despite the risks, is Bitcoin becoming mainstream? - CityAM
2020 was a record-breaking year for Bitcoin, and this year may not be any different. Despite its spectacular drop last week, the crypto frenzy is far from over. Banks, well-known business leaders and investors all seem to jump on the digital currency bandwagon.
Bitcoin has come a long way since it first launched in 2009, when – in its first year alone – individual coins jumped in value from USD 0.0008 to USD 0.08.
In recent months, Bitcoin hit an all-time record high helped by PayPal, Mastercard, Elon Musk, BNY Mellon’s adoption and the influx of institutional funds, which has given Bitcoin some credibility and legitimacy.
Interest among retail investors is also on the rise and, last month, the currency was given a major boost when the US Office of the Comptroller of the Currency stated that national banks can use blockchain networks and Stablecoins for payments, further legitimising digital currencies.
Read more: Crypto selloff sends Bitcoin tumbling below $50,000
‘Mother of all bubbles’
However, meteoric rises and falls in value still seem to be the norm with Bank of America to speculate recently that the current bitcoin run is “the mother of all bubbles.”
Morever, the UK’s financial regulator, the FCA, issued an unusual warning on crypto investments, saying that “if consumers invest in these types of product, they should be prepared to lose all of their money.”
“The news is not all bad,” commented John Hunter, business development director at Zedra Guernsey, a wealth and fund solution provider.
“Last month J.P. Morgan’s prediction proved to point he right way ahead based on last days developments,” Hunter told City A.M. this evening.
The banking giant projected the price of bitcoin could hit $146,000 as more big firms embrace it as an alternative to gold.
The regulatory interest and bank analyses show Bitcoin is increasingly drifting into the mainstream domain, with more and more non-crypto focused traders zooming in on the currency.
“For long-term investors who went in early or when bitcoin had a low valuation, bitcoin can be a lucrative investment. Experienced investors who have significant capital available to invest and who can afford to take big risks in the hope of big rewards are all enjoying the Bitcoin ride,” Hunter noted.
Read more: Bitcoin price crashed! Here is what comes next
Risk
While the risks surrounding Bitcoin are widely accepted, investor concern often centres around the fact that fiat money is exchanged for a virtual asset and vice versa.
Bitcoin ownership is recorded in ledgers but the relatively new nature of cryptocurrencies, the fact that all transactions are digital, and the lack of regulatory oversight all play a part, Hunter pointed out.
“In essence, those investing in Bitcoin or cashing out their investment into fiat money want to protect their interests. The point at which fiat cash and a cryptocurrency meet can feel like a natural weak point,” he said.
Therefore, so-called escrow agreements are increasingly popular for bitcoin transactions as they present a win-win for all parties.
“Traditional escrow agreements are used to protect the interests of the seller and the vendor and it’s the same for Bitcoin transactions,” Hunter explained.
Escrow becomes especially relevant when the value of Bitcoin increases significantly and more cash needs to be deposited to purchase Bitcoin, he concluded, “or when there is a liquidation that translates to a significant amount of fiat money.”
Read more: Elon’s Bitcoin bet hands Jeff Bezos back title of world’s richest person
Bitcoin cracks 19% to fall below $49,000 level as crypto rally falters
NEW DELHI: Cryptocurrencies extended losses on Wednesday, with Bitcoin cracking 19% to slip below the $49,000 level. The biggest cryptocurrency, in terms of market capitalisation, traded at $49,767, down 14.6% at around 1155pm, as per data available with WazirX.
Bitcoin had hit an all-time high of $58,332.36 last week.
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“Over the last 24 hours, crypto markets saw a bloodbath with all major cryptocurrencies taking a plunge. Bitcoin price dropped as much as 19% and is trading at $47,400 at the time of writing. Many analyst points towards an over-leveraged market as the primary cause for the price dip. The second-largest cryptocurrency by market cap faced a severe blow too after hitting its all-time high price of $2,000. It is currently trading at $1500. The gas fee on the Ethereum blockchain is also seeing a record high spike leading to a $25 million liquidation on DeFi platforms,” said Ashish Singhal, chief executive officer and co-founder, CoinSwitch Kuber, cryptocurrency investment platform.
Decentralized finance or DeFi is an experimental form of finance that does not rely on common financial intermediaries such as brokers, exchanges, or banks to offer traditional financial instruments, and instead utilises smart contracts on blockchains. Ethereum is the most commonly used crypto for DeFi applications. A spike in transaction charges on Ethereum network tends to affect DeFi activity.
During the last 24 hours, Bitcoin hit a high of $51,413.61 and a low of $44,964.49, while Ethereum, the second-biggest cryptocurrency, hit a high of $1,655.63 and a low of $1,361.59.
Ethereum traded at $1,630.89 at around 1155pm, down 20% from its all-time high $2,036.55 mark. Stellar traded 18% lower at 0.41.
Meanwhile, regulatory opinion has hardened against cryptocurrencies in India.
“We have major concerns about cryptocurrency from a financial stability perspective,” Reserve Bank of India governor Shaktikanta Das told news channel CNBC TV18 on Wednesday.
Last week, Bitcoin became the first digital currency in the world to hit a market valuation of $1 trillion. It took the crypto asset less than two months to reach this mark from $25,000 as of end of December.
Prices rose as several big corporates took exposure to bitcoin.
Currently, Bitcoin commands a market cap of $931.82 billion.
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Crypto world: Cryptocurrencies pose unique challenges and need a judicious approach
In the flux after the 2008 financial crisis, an extraordinary instrument dubbed cryptocurrency was created. Bitcoin, the first cryptocurrency, was introduced by Satoshi Nakamoto, a pseudonym used by the mysterious originator. It turned our understanding of currency on its head. Inspired by the philosophy of “self-sovereign identity” cryptocurrencies are an asset which are not anyone’s liability; neither is there a single authority or institution to maintain records. What we have are digital currencies designed for decentralised operations, cutting out a regulated intermediary like a bank.
Conventional money, or fiat currency, is issued by the state. It is usually the liability of a central bank such as RBI, which also oversees the recordkeeping of transactions. Its essential features are the credibility that comes from being guaranteed by the state, which leads to a central record keeper like RBI. Cryptocurrencies such as Bitcoin and Ripple are just the opposite. They are underpinned by a network called blockchain, run by anonymous computers linked together by a ledger of anonymised transactions. There are two potential issues that arise from cryptocurrencies. Will they supplant conventional currency, a state monopoly? Highly unlikely because inherent limitations of cryptocurrencies limit scalability and mass use.
A cryptocurrency like Bitcoin is also traded on exchanges, including in India, taking on the role of an asset. Here many governments, including India’s, have taken a dim view. Cryptocurrencies thrive on anonymity. They open the door to peer-to-peer transactions that circumvent state controls. FATF, the inter-government body that sets standards to combat money laundering and terror financing, worries about this instrument becoming a safe haven for illegal deals. Will a ban on cryptocurrencies solve the problem? It won’t because not only do they already exist, they are designed to bypass normal filters. It is a tricky issue which needs a well-thought approach.
Facebook Twitter Linkedin Email This piece appeared as an editorial opinion in the print edition of The Times of India.