Bitcoin ends week in freefall as China warns of crypto crackdown

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The largest digital currency fell as much as 10 percent in late Friday trading, reaching as low as $35,636, with other tokens also posting double-digit losses.

Bitcoin is heading into the weekend in freefall again after a fresh warning from Chinese officials over cracking down on cryptocurrencies.

The largest digital currency fell as much as 10% in late Friday trading to as low as $35,636, and peer tokens also posted double-digit losses. The coin almost hit $30,000 earlier in the week, after ending May 14 at $49,100.

The latest blow came when China’s State Council reiterated its call to curtail Bitcoin mining and trading. The crypto market was already rattled earlier in the week by forced selling and possible U.S. tax consequences.

Friday’s selloff hit Bitcoin believers still fuming after onetime proponent Elon Musk did an about-face and criticized the token for its energy usage. Bitcoin is down about 25% since last Friday, though it’s up from a Wednesday plunge to as low as $30,000. Other coins have slumped too — Ether is down about 38% over the past seven sessions.

The sour stretch started with Musk suspending acceptance of Bitcoin payments at Tesla Inc. and trading barbs with boosters of the cryptocurrency on Twitter. China’s central bank added to the downdraft Tuesday with a statement warning against using virtual currencies. On Thursday, it emerged the U.S. may require crypto transactions of $10,000 or more to be reported to tax authorities.

China has long expressed displeasure with the anonymity provided by Bitcoin and other crypto tokens, and warned earlier that financial institutions weren’t allowed to accept it for payment. The country is home to a large concentration of the world’s crypto miners, who require massive amounts of power and thus run afoul of the nation’s efforts to curb greenhouse-gas emissions.

“The new guidance issued from the regulatory agencies — they’re taking it more seriously, they want more enforcement,” Bobby Lee, founder and chief executive officer of crypto storage provider Ballet, said in an interview Friday. “There’s talk about going after miners. The question is, can they catch all the miners.”

China’s moves this week highlight the country’s continued desire to seek control over the notoriously volatile asset class. It’s something China would rather see regulated by the People’s Bank of China, market-watchers say.

“It’s not really the mining issue that is the problem,” said Matt Maley, chief market strategist for Miller Tabak + Co. “They say they’re doing this as part of an effort to control risk-taking in their markets, but it’s really a signal that China is not going to be a big market for cryptos unless it’s a PBOC-controlled one.”

In the meantime, volatility in Bitcoin is likely to stay elevated. The selloff Friday once again pushed Bitcoin below its average price over the past 200 days, which to some chartists and technical analysts suggests it could trend lower still to around $30,000, where it found support earlier this week.

This week’s swings have led to huge liquidations by leveraged investors and damaged the narrative that cryptocurrencies will become more stable as the sector matures. Musk’s actions showed how just a few tweets can still upend the entire market. But even moreso, the past few days have renewed the regulatory threat on the crypto market.

“Investors are underestimating the regulatory risk of crypto as governments defend their lucrative monopolies over currency,” said Jay Hatfield, chief executive officer of Infrastructure Capital Advisors in New York. In the U.S., the possible imposition of transaction reporting requirements could be the “tip of the iceberg” of potential Treasury rules on virtual currencies, he said.

As far as regulations in China go, it may be a game of wait and see.

“You must always proceed cautiously with China — never get too bullish or bearish,” said David Tawil, president of ProChain Capital. “We’ll have to see what the regulation brings. It’s one thing to say, it’s another to do.”

Cryptocurrency: Please don’t go crypto crazy

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OPINION: There is a belief in financial markets that once taxi drivers start asking you about particular investments, it’s the top of the market. Many are very smart, but they’re unlikely to be investment experts.

I have experienced this twice. The first was a New York taxi driver asking me about internet companies in 2000, a few months before the internet bubble burst.

The second was yesterday, when an Uber driver asked me which cryptocurrency to buy. Then during the Uber ride, a real estate agent phoned me up asking which cryptocurrency to buy.

So my alarms bells are on full noise.

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After observing the cryptocurrency market, without ever investing a dollar in it, my conclusion is it’s a great place to gamble, but a terrible place to invest. Here’s why.

First, the basic premise of cryptocurrencies that there will only ever be a limited amount, is simply not true. Bitcoin may have a finite number of coins mined, but other cryptocurrencies are popping up all the time. And some major ones, like ethereum, have a potentially unlimited supply.

So while membership to one crypto club (bitcoin) might be restricted, if there are other similar clubs opening up down the road, how can it stay exclusive? When there are tons of something around, it’s usually not worth much.

Dan Kitwood/Getty Images After observing the cryptocurrency market, without ever investing in it, my conclusion is it’s a great place to gamble, but a terrible place to invest.

The second reason is cryptocurrencies have no intrinsic value, other than as a place to park or hide money. It’s only worth what someone is prepared to pay for it. In this, cryptocurrencies are the digital equivalent of gold, except that gold is useful in all sorts of things, such as electronics.

The other thing that spooks me about cryptocurrencies are they can be lost, or vanish, and all too easily. And they can be stolen, as some holders have found when their vault has been hacked. Cryptocurrencies may be stored in places called vaults, but you can lose your password and never get access again or have your vault emptied by hackers. And if either happens, there is no regulator or supervisor to run to.

And let’s remember that one of the supposed advantages, the fact that cryptocurrencies are unregulated, is also a liability. No authorities are there to protect investors. That’s fine if you’re a criminal hiding money, but scary if it’s your hard-earned savings that you’ve effectively buried in the wild west. And in this wild west, there are no marshals to protect you.

Another reason is the environmental toll from mining cryptocurrencies. I’ve heard various estimates, from bitcoin requiring the power of Norway, to it needing just the power of one medium-sized city. But any way you look at it, it consumes a lot of power, and is a poor environmental choice.

I have a moral issue too. Cryptocurrencies are ideal for laundering money. Critics of my stance here would say the US dollar is the criminal’s friend too. But the authorities try to clamp down on money laundering via cash and currencies, but not so crypto. Once again, it’s the wild west, with a lot of unsavoury characters roaming around. That’s not where I want my money to be.

Another reason I’m wary is the way cryptocurrencies are sold. It seems like those selling them are using same tactics as Ponzi schemes of the past. They appear to be playing on the gullible and least informed, and inciting fear of missing out (FOMO). Buyers are hoping that someone will be even more excited than them, and buy what they bought, at a higher price. That might be a short-term winning bet, but betting on excitement, emotions and FOMO is a bad investment.

Jonathan Newton/The Washington Post The price of cars doesn’t change 20 per cent in a day because Elon Musk tweets on Tesla, but it does with cryptocurrencies.

Another reason I’m concerned is if cryptocurrencies really are currencies, then why can’t they be spent? Much is made of some banks reporting clients holding them in portfolio summaries, but that is simple stuff involving no real risk or commitment on the banks behalf.

But very, very few things you can see, feel or touch can be bought with cryptocurrencies, and that’s 12 years after bitcoin came to be. Of the claimed 300,000-plus daily transactions in cryptocurrencies, very few are related to consumption of anything useful. And Elon Musk, a famous booster of crypto, has just said you can no longer buy Tesla cars with it.

And the final nail in the investment coffin for me is the uncertainty of it all. Cryptocurrencies values are subject to wild swings on rumours and personalities. The price of bitcoin has dropped 80 per cent in the past, a drop as big as we saw in the Great Depression or GFC. The price of cars doesn’t change 20 per cent in a day because Elon Musk tweets on Tesla, but it does with cryptocurrencies.

LAWRENCE SMITH/Stuff Simplicity’s chief executive and Stuff contributor Sam Stubbs.

And nearly all the numbers quoted in this article, and others, are unproven, conjecture and re-quotes. Nothing is certain in this life, but absolutely nothing is certain about cryptocurrencies. Ignorance, uncertainty and obfuscation are not sound foundations for investment.

So, get involved in trading cryptocurrencies if you want. But as the Ancient Romans said, “caveat emptor” - let the buyer beware. Treat it like you would gambling, and you will be in the right mindset. You could make a fortune, or lose all your money, and all for reasons totally beyond your control.

But under no circumstances treat cryptocurrencies as an investment. They are simply not.

Sam Stubbs is the founder of KiwiSaver scheme Simplicity.

Goldman’s Crypto Chief Worries About Fraud, but Not Cryptocurrency’s Future

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InvestorPlace

As Bitcoin (CCC:BTC-USD) prices collapsed this week, crypto investors have been left looking much like a deer in headlights. ETF flows for most of the six popular blockchain ETFs have largely remained stagnant even as crypto prices plummeted. Source: Shutterstock The indecision highlights a worrying truth: Bitcoin investors are shifting from an aggressive profit-seeking crowd to one that’s increasingly fearful of missing out. In March, the Grayscale Bitcoin Trust (OTCMKTS:GBTC) – a proxy for institutional investor interest – saw its NAV premium flip from positive to negative. In their place, conservative investors have stepped in. On Wednesday, Wells Fargo (NYSE:WFC) joined other wealth management teams in announcing plans to open crypto trading to high-net-worth clients. (Apparently, it’s better to let your customers lose money than losing it yourself). Meanwhile, forward-looking investors moved onto more technologically advanced cryptocurrencies like Ethereum (CCC:ETH-USD), Cardano (CCC:ADA-USD) and Internet Computer (CCC:ICP-USD). Central banks have also announced plans to launch digital currencies of their own.InvestorPlace - Stock Market News, Stock Advice & Trading Tips That makes a BTC recovery ever more unlikely. As Bitcoin’s age starts to show, its future has never looked wobblier. Bitcoin Prices: Fallacy of the $60,000 Price Target Bitcoin’s 30% slide this week highlighted a fact that experienced investors have long known: Bitcoin has no fundamental value. Talks about $60,000, $600,000 or $6 million price targets ring hollow because cryptocurrency is only worth how much your next-door neighbor is willing to pay. (Lucky are those living next to a Goldman Sachs office). The Top 7 Ways to Invest in Semiconductors Now The lack of a serious price target has long benefited Bitcoin holders. Influential investors like ARK Innovation’s Cathie Wood have long proclaimed $500,000 price targets without providing any deep rationale. Squint hard enough, and any value seems possible. The benefits, however, cuts both ways. Since 2020, Bitcoin prices have become more like a leveraged bet on investor confidence than on cryptocurrency adoption. According to data from Thompson Reuters, the cryptocurrency now has a 25% correlation with the S&P 500 and a 34% correlation with Tesla (NASDAQ:TSLA). The stock market’s 4% wobble last week sent crypto prices crashing a third. Ordinarily, investors might want to buy the dip. The stronger-than-expected post-Covid recovery led banks to revise stock projection upward. Bitcoin would presumably win too. But this time might be different. As experienced crypto investors have also long known, Bitcoin’s community is astonishingly status-quo. As other competitors continue to rise, Bitcoin will find itself falling ever further behind. The Bitcoin Protocol: Miner League Stakeholder-led cryptocurrencies like Ethereum have motored ahead. In November, the world’s No. 2 crypto joined Cardano and other “third-generation” coins in launching an energy-efficient proof-of-stake protocol. Rather than have miners waste energy on pointlessly complex calculations, PoS systems run on a system of approved validators. Energy savings can top 99.7% or more, and crypto watchers expect Ethereum to fully transition its blockchain to the PoS protocol by the end of the year. These improvements are possible because cryptocurrencies like Ethereum rely on a stakeholder-based voting system rather than a mining-based one. With enough support from the Ethereum Foundation and community, beneficial proposals can proceed without miner support. Centralized cryptocurrencies have found it even easier to push changes. Ripple controls 60% of all XRP, making amendments virtually effortless to pass. Bitcoin, on the other hand remains relatively stodgy because of a historical quirk in its development: BTC miners hold an outsized vote in protocol changes. Though miners only account for 10% of supply, the Bitcoin protocol doesn’t work on a democratic voting system. Instead, all proposed changes run through a similar process – miners must reach a consensus for any proposal to pass. While the system can prevent fraud and security issues, it also makes the cryptocurrency demonstrably hard to change. The Bitcoin community put this theory to test in 2017 when they launched a bid to increase the cryptocurrency’s block size limit. Only when 95% of miners accepted the change did the software upgrade pass. That makes a switch to an energy-efficient PoS system virtually impossible without a hard fork. No miner will willingly vote for a more energy-efficient system when it would render their billion-dollar investments in ASIC machinery worthless overnight. It’s a prisoner’s dilemma where stakeholders acting in self-interest poisons the cryptocurrency for both themselves and everyone else. Already, former Bitcoin champions like Tesla CEO Elon Musk have walked back support for the energy-burning cryptocurrency. More backlash could be on the way. Rearranging Deck Chairs on the U.S.S. Bitcoin That hasn’t stopped Bitcoin fans from giving up hope. In April, Niklas Nikolajsen, the founder of Swiss crypto broker Bitcoin Suisse, predicted that Bitcoin would eventually move to the energy-efficient PoS protocol. “I’m sure, once the technology is proven, that Bitcoin will adapt to it as well,” the entrepreneur noted in a German TV interview. In truth, Bitcoin’s technology has fallen so far behind that it might not matter. Today, the cryptocurrency can still only act as a medium of exchange, not a payment processor or commercial bank. It’s the banknotes of the cryptocurrency ecosystem rather than the pipes or pumps. As time moves on, this weakness could become Bitcoin price’s death knell. In its current state, the crypto’s limited functionality makes it vulnerable to competition from central bank-sponsored digital currencies. China’s e-Yuan project has already threatened Bitcoin’s viability in the People’s Republic. A digital dollar could eventually do the same in the U.S., threatening the entire value of Bitcoin’s $1 trillion market capitalization. Combating this involves using blockchain technologies for more than transactions alone. Projects like Ethereum have already moved into NFTs, creating electronic deeds for artwork and collectibles. Others like Celsius (CCC:CEL-USD) allow users to borrow and lend money much like a commercial bank. The latest addition to the industry – Internet Computer – promises to use decentralized networks for cloud computing and website hosting. Bitcoin, however, has fallen short. Its current projects focus on minor improvements to wallets and bug fixing rather than the sweeping changes it needs to keep up. There’s a good reason why early moving crypto investors have abandoned Bitcoin’s stodgy technology. You should, too, while you still can. On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article. Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing. More From InvestorPlace Stock Prodigy Who Found NIO at $2… Says Buy THIS Now It doesn’t matter if you have $500 in savings or $5 million. Do this now. Top Stock Picker Reveals His Next Potential 500% Winner The post As Bitcoin Prices Slide Below $40,000, Should You Buy the Dip or Sell? appeared first on InvestorPlace.