Cryptocurrency markets fell this week as a string of bad news
pummeled markets fresh off of new highs.
Let’s break down what happened, and why it shouldn’t impact
the long-term trajectory for cryptos.
It began on Monday, when news circulated that China is reportedly
looking to reign-in domestic mining operations.
Chinese mining operations currently account for nearly 79%
of all bitcoin mining globally.
As reported by the Financial Times, a multi-agency task force issued
a statement in early January directing local governments to
pressure mining firms to reduce operations.
In response to the directive, Chinese miners have reportedly begun
looking to relocate operations abroad — in locations with cheap energy
and cool climates, which is beneficial for cooling electronic components.
China has a history of attempting to intervene in cryptocurrency markets...
In late 2017, the government moved to ban fundraising via initial coin offerings
and subsequently ordered cryptocurrency exchanges to cease domestic operations.
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Separately, in a release on Thursday, Reuters reported that South Korean
officials plan to ban cryptocurrency trading.
Of course, South Korean enthusiasm for cryptocurrency investments
has exploded in recent months.
The east Asian country currently accounts for nearly 20% of all bitcoin trading globally.
So the report rattled cryptocurrency markets, sending prices of ethereum
and bitcoin down by more than 10%.
Now, the report was later discredited.
Officials from other branches of the government clarified
that no immediate ban was being considered.
And markets responded positively to the clarification.
But the uncertainty continued to weigh on markets by late Thursday afternoon.
A Dilemma for Regulators
This won’t be the last time regulators will attempt to step in and police this market.
As this market continues to grow, the potential risk to the real economy grows more likely.
Regulators will increasingly be tempted to protect their own interests
and safeguard their citizens.
However, regulators have a dilemma…
They can try to ban cryptocurrencies completely, or they can work to develop
solutions to accept the changing market landscape.
I expect them to try both.
But as we’ve seen with alcohol prohibition, the war on drugs, and digital music
piracy the government has a terrible track record enforcing bans on goods and services which people want.
Ultimately, China’s approach allows the government to signal their intention
to influence markets without strict regulation.
But this will likely embolden the anti-government ideology which already pervades these products.
So while many believe that unfriendly regulatory actions are a risk to cryptocurrencies,
it appears that regulators may be adopting a more tactful approach.
All of this uncertainty represents tremendous opportunity.
As we saw with this week's selloff, regulators are likely exploring ways to gradually
take the air out of this market.
However, if these attempts prove unsuccessful, we could see more oppressive policy decisions in the future.
I continue to remain bullish on the long-term potential of cryptocurrency
and continue to advise my readers to buy dips in bitcoin.