Kanawat TH
I’ve been bearish on Bitcoin (BTC-USD) since my October 2021 article when I saw the risk of regulation among other threats. Investors cheered Bitcoin’s January rally, but it’s technical nothing has fundamentally changed in nature and in the largest cryptocurrency in the world.
The Bitcoin rally was a tax loss that brought a brief squeeze
Bitcoin’s January rally surprised the market, surging from around $16,000 to $24,000. However, further gains could be hard to come by as nothing fundamentally changed for BTC.
Bitcoin started November around $21,470 and is now trading at $22,586 with the recent standstill suggesting a return to $21-21,500.
The November dump was caused by the FTX collapse, while we saw another drop from December. Many cryptocurrency investors, particularly institutions, will have taken advantage of tax loss relief. tax loss Harvesting is an investment strategy that allows investors to limit future tax liabilities by taking advantage of losses in a current investment year.
In the stock markets, accumulating tax losses carries the risk of IRS scrutiny, since an asset sold and repurchased within 30 days can be classified as a “wash trade.” While there is no formal regulation for crypto, it would have been wise to sell before December’s upcoming regulation.
The heavy buying of bitcoin in early January also led to a huge short squeeze, so the rally in bitcoin is purely technical. If we needed a bell to ring, it could be an article by Barron predicting a “GameStop Moment” in Coinbase (COIN).
I advised my subscribers to buy back Coinbase on Jan. 11 for a potential 100% rally and it quickly made 70%, but I cautioned that this was a short-term trade and not an investment.
Miners Rush to Sell BTC as Industry Consolidates
The bitcoin mining industry suffered in 2022 as indebted miners struggled with the bear market in bitcoin prices.
With the merger of Hut 8 (HUT) and US Bitcoin announced this week, the industry has now turned to consolidation to survive. The move follows bankruptcies in the mining industry. While some miners were able to acquire new mining rigs and equipment at distressed prices, others such as Austin’s Core Scientific filed for bankruptcy. Greenidge Generation Holdings (GREE) now announced a debt restructuring with its creditors in late January, and Pennsylvania-based Stronghold Digital (SDIG) did the same this week.
Another aspect of this activity is that companies have taken advantage of the recent rally to cash in some of their bitcoin to pay for operational expenses. Nevada-based Marathon Digital Holdings (MARA) said in its production update last week that it would sell 1,500 BTC to fund operating costs.
“Marathon may continue to sell a portion of its Bitcoin holdings in future periods to support monthly operations, manage its finances, or for general corporate purposes,” the company said.
If bitcoin price continues to falter, further miner selling could cap any price gains. Another feature of this is that the rally has helped other struggling crypto investment firms that have been struggling in the downturn. Forbes magazine estimated in August that 51% of Bitcoin trades are fake, raising further questions about liquidity.
Regulation and other risks continue to weigh on bitcoin prospects
Bitcoin’s rally was technical in nature and nothing supports any real changes in the coin’s prospects. Institutions have been afraid to buy into cryptocurrency and that has only worsened with the FTX fallout and lack of regulation and transparency. There are many risks to the crypto market, one of which is Binance. I wrote an article on Binance highlighting the risk to the overall market as it is the largest trading exchange with a 24-hour trading volume of $15-20 billion versus its closest rival’s $1.5-2 billion Coinbase is. Binance has not been very transparent about its reserves and is under constant scrutiny with a recent money laundering investigation and ties to the seized Bitzlato exchange.
The really big risk lies in regulation as the market police step up their efforts with a stronger mandate following the collapse of the FTX empire. Bitcoin’s recent price drop is being attributed to news that another crypto exchange is under SEC scrutiny. The regulator was reportedly investigating San Francisco-based exchange Kraken for violating securities laws. It was later reported that Kraken paid a $30 million settlement and agreed to end its crypto staking operation in the US. Rumors are circulating that Coinbase will also be forced to end its staking operations, which could contribute to recent job cuts at these companies.
The SEC indicted exchanges Gemini and Genesis in January for securities violations, and it could mark the start of a wave of enforcement after SEC Chairman Gary Gensler previously said that “most” cryptos are securities.
Investors need to look at an important aspect of the SEC’s work. They tracked Ripple to slow payments progress, they tracked Binance and now Kraken to slow exchanges growth, and they even investigated the creator of the Bored Apes NFT collection. These moves, combined with the indictments against Gemini when the exchange was on the verge of bankruptcy, are a clear sign that the SEC is using force and will continue to do so.
Global regulation is a mechanism that will clip the wings of the decentralized newcomers and serve the current players in the financial system. The International Monetary Fund is widely used when it comes to regulating the industry and they laid out their ideas after the FTX issues which I have summarized as follows:
- “We believe that crypto asset service providers that provide critical functions should be licensed, registered and authorized.” This requires audits of exchanges and increased scrutiny.
- “The recent FTX outage has highlighted how the combination of exchanges, wallets and market-making services in one group poses significant risks for clients. It is particularly important that client assets are segregated from other functions.”
- “Stablecoin issuers should be subject to strict regulatory requirements. We need strong, bank-like regulation for stablecoins, and central banks should take the lead in such an endeavor given the potential presence of stablecoins in the monetary system.” More audits.
- “There should be clear requirements for regulated financial institutions regarding their exposure to and engagement with crypto.”
- “Eventually, we need robust, globally consistent and comprehensive regulatory responses to achieve effective crypto regulation and oversight. The cross-sector and cross-border nature of cryptoassets limits the effectiveness of uncoordinated national approaches.”
In short, bye bye to a decentralized financial system. Cryptocurrency will simply be a digital version of the current system overseen by the same institutions.
Finally, in the event of contagion, the market may not be past the worst yet, as another BTC downturn would hit and even worse hit the mining industry and struggling companies like Silvergate Capital (SI), which could be the next company to go bankrupt threaten its ailing conglomerate, the Digital Currency Group.
Big banks are entering the digital money arena
Although some investors question the ability of central bank currencies (CBDCs) to get off the ground, all major countries are exploring the option, with the UK pushing it harder of late.
The Bank of England and the UK Treasury plan to launch a digital pound by 2025.
Another threat to decentralized money has emerged in the form of a digital payments project aimed at ApplePay and PayPal dominance. JP Morgan (JPM), Bank of America (BAC) and Wells Fargo (WFC) are among the firms launching a digital payments wallet through their joint venture with Early Warning Services, LLC, which manages their cell payments network bring.
The big banks want to target the popularity of their digital rivals with PayPal (PYPL) with more than 400 million active wallets in 2022, while Apple Pay had over 500 million active users.
It is clear that we are moving into a digital age of money. However, it is still unlikely that the global payment system will be decentralized.
Diploma
Bitcoin investors have cheered a sharp rally in January, fueled largely by tax loss reallocation and a major short squeeze. As the dust settles on this retail movement, the cryptocurrency world is no closer to mass adoption or institutional purchase. The arrival of digital payment options from the big Wall Street banks and the fallout from the collapse of decentralized finance and the FTX exchange could mean they are even further away. Bitcoin is currently a trading vehicle that tracks Fed rate hikes and inflation while responding to negative sentiment through regulation etc. Investors should treat it as such and not get carried away by the hype.
Editor’s Note: This article covers one or more Microcap stocks. Please be aware of the risks associated with these stocks.
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