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It was a cold and hard crypto winter. But signs of a thaw, fueled by global currency chaos, are beginning to emerge.
What’s happening: Bitcoin rose to its highest level in more than a week on Tuesday, gaining more than 5%, as the British pound and other currencies suffered defeat against the ultra-strong dollar. The gains gave crypto bulls hope that bitcoin is becoming a safe-haven asset, or one that acts as a hedge when stocks fall.
Then, around noon, the dollar rallied and bitcoin crashed again, erasing all recent gains. Bitcoin fell another 1% on Wednesday after the Bank of England tried to shore up UK debt.
When the dollar is strong, “there are no safe havens,” eToro crypto consultant Glenn Goodman warned on CoinDesk TV on Tuesday.
A little background: Bitcoin struggles for direction: The digital currency has been hovering between $18,000 and $25,000 since mid-June after a massive crash that wiped nearly $2 trillion from the crypto market. It it is currently down 60% year-to-date.
The coin has soared through the Covid era on the wings of near-zero interest rates, monetary stimulus and a large influx of investors from large institutions, reaching an all-time high of nearly $70,000 in November.
After that, central banks started raising interest rates to fight inflation and the dollar strengthened significantly, luring investors as the ultimate safe haven. At the same time, the economy began to deteriorate and those new investors who still viewed Bitcoin as a risky asset came out in droves. The crash triggered a wave of bankruptcies among young companies such as crypto trading platforms Voyager and Celsius.
“In the current macro climate, when you have inflation and huge selloffs and big crypto projects that fail, people are going to pull out,” Tyler Winklevoss, co-founder of crypto exchange platform Gemini, told me in an interview earlier this month. “Bitcoin is still new, so it is still seen by many as a risky asset. And as people take risk off the table, Bitcoin will suffer. But all assets are suffering, Bitcoin is not alone in this.”
The silver lining: But even as bitcoin prices fall, investors are seeing signs of a bottom.
Ben Gagnon, chief mining officer at Bitfarms, sees anything below $20,000 as the price at which fair-weather institutional investors pull out of the currency for good, which will help stabilize bitcoin’s current volatility and send it higher.
As of Wednesday morning, Bitcoin was below $19,000.
“I would be very surprised if we finish the year that low,” Gagnon said. “I think bitcoin will start to recover now that it’s kind of shaken off a lot of the excess.”
“It’s an interesting time,” said Chris Klein, COO and co-founder of Bitcoin IRA, a digital asset technology platform. “For the last eight months, bitcoin has behaved like a tech stock because there were so many institutional investors in it.” As that money flows out, he said, things can change.
It’s a big topic, but Bitcoin proponents remain cautiously optimistic.
Crypto supporters aren’t too happy with the Federal Reserve, and that opinion seems to run both ways.
Fed Chairman Jerome Powell called for greater regulation of digital assets on Tuesday morning at a conference by the central bank of France on the digitization of finance.
While crypto bulls will likely argue that the decline in markets and other assets has caused the value of digital currencies to plummet, Powell said he worries about the opposite. The recent immersion in bitcoin prices, he said, could spill over and trigger wider financial turmoil. Digital currencies should be regulated and have checks just like other marketable assets, he said.
“There is a real need for more appropriate regulation,” he said, especially as crypto “expands and starts to affect more retail customers.”
Other central bankers were not as nuanced as Powell. “I don’t see any redemption value” in cryptocurrencies, said Ravi Menon of the Monetary Authority of Singapore. “Their time of reckoning has come.”
The Federal Reserve does not regulate cryptocurrencies in the United States, but it does monitor cryptocurrencies held by banks. The central bank is also considering launching a central bank digital currency, which is essentially a digital version of the dollar.
That currency isn’t coming anytime soon, Powell said. “We see this as a process for at least a couple of years where we work and build public confidence in our analysis and in our ultimate conclusions, which, as I said, we certainly haven’t come to yet.”
Representatives Maxine Waters and Patrick McHenry are trying to negotiate a bill it will regulate the companies behind stablecoins – digital assets that are pegged to the dollar and used as an alternative to the high volatility of cryptocurrencies like bitcoin.
The bill would subject them to Federal Reserve oversight and reserve requirements to protect customers in the event of a default — exactly the kind of regulation Fed Chairman Powell called for on Tuesday.
But the can continues to be kicked down the road. That’s because Congress is “wrangling over how to craft the bill’s text,” Politico reports. They have problems with how to regulate crypto.
“I don’t think anyone would advise that someone who isn’t aware or familiar with the industry is in a position to legislate and regulate,” Ben Gagnon, who engages with politicians to advocate for his firm, told me for crypto mining, Bitfarms.
“There are some federal government initiatives by agencies to study bitcoin, but that process is largely non-existent,” he said.
The White House recently released its own plans to regulate crypto, but critics say they lack real teeth. The Blockchain Association, one of the largest digital asset industry groups, said the Biden administrations report lacked “substantive recommendations.”
Executive director Christine Smith said in a statement that the report focused too much on criticism of the industry and was light on politics. She called the reports “a missed opportunity to solidify US crypto leadership.”
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