Bitcoin surge prompts new warnings from regulators

Regulators issue warning to cryptocurrency investors after Bitcoin reaches new all-time high

By Jeremy Chan | 15 January 2021

Regulators issued fresh warnings on investing in cryptocurrencies after Bitcoin skyrocketed to a new all-time high last week.

The UK’s Financial Conduct Authority (FCA) cautioned consumers about the high risks involved in investing in cryptocurrencies.

“Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money,” the City watchdog said in a statement. “If consumers invest in these types of product, they should be prepared to lose all their money.”

The warning closely follows the regulator’s ban on selling crypto-derivates to consumers which came into effect January 6.

As of this week, all crypto asset firms in the UK must be registered with the FCA as part of regulations to target money laundering.

European Central Bank (ECB) President Christine Lagarde also called for global regulation of Bitcoin on Wednesday.

“(Bitcoin) is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity,” Lagarde said in an interview at the Reuters Next conference.

The warnings, along with increased regulatory scrutiny, comes as Bitcoin surged to an all-time high of above $41,000.

New peak doubles 2017 high

Bitcoin’s first price spike came in 2017, peaking at almost $20,000. A year later, the price dropped to below $4,000.

However, the latest Bitcoin surge was not driven by mere investor hype, according to James Iuorio, broker, trader and managing director of TJM Institutional.

“In 2017, when the price of bitcoin was rallying and rallied up to $20,000, that was just people embracing an exciting new technology, it became like a religion among the enthusiasts.

“[Last year’s] initial move up to $20,000 was about a genuine concern of currency policies being implemented by the Federal Reserve,” says Iuorio. “Rates kept at zero for extended periods of time and a federal government that was going to throw everything as far as deficit spending on the current problem. This caused people to question what the dollar’s role was going to be going in the future.”

While Iuorio is not predicting a currency crisis he says that even the possibility that current monetary policy may raise the risk of a crisis scenario could invite investors to hedge. In the eyes of some investors, Bitcoin has joined the ranks of gold and silver as a safe haven asset.

Iuorio does however attribute the rest of the surge, from $20,000 to over $40,000, to a fear of missing out (FOMO). “Once we broke above $20,000, I think the animal spirits came in. It was mostly a fear of missing out that pushed it from $20,000 to $40,000. That happened in the blink of an eye.”

Institutional investors pile in

Another trader, Scott Bauer, CEO of Prosper Trading Academy, agrees that FOMO is partly responsible but adds that the December surge also coincided with many institutional investors jumping into the market.

“Institutional buyers have piled into the marketplace ever since Bitcoin hit about $20,000. [They are] not just into the coin itself, but also investing into futures positions. That has been really fueling a lot of the upswing, because these institutional buyers, they're not in it to trade it, they're in it to buy and hold.”

According to the CME, trading in Bitcoin futures is up 114 percent year-over-year as of December 2020. The number of large open interest holders is also up 121 percent compared to the same time last year, indicating growing interest among institutional investors in the cryptocurrency. In total more than 2.2m Bitcoin futures contracts were traded in 2020.

However, not all are optimistic about the future of Bitcoin.

“Bitcoin’s past two years blows-the-doors-off prior bubbles,” according to a report from Bank of America (BoA).

Since 2019, the cryptocurrency has surged over 900 percent. In comparison, the dot com bubble only saw a peak of around 300 percent, the BoA report noted.

Even if Bitcoin dropped to $20,000, Bauer would not view it as an asset bubble.

“Someone that wants to be actively trading has to go into this knowing that they could see 20 percent swings at any one time,” he says. “Do I see a bubble forming? I definitely see a short-term top; it would not surprise me to see Bitcoin lose 20 to 25 percent.

“It would surprise me to see it go down into the teens, but it wouldn't surprise me to see it go back into the mid 20s. I wouldn't call that a bubble. I would call it a correction.”
 

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