News Analysis

Bitcoin exceeds expectations but risk spikes

By Rochelle Padolina

Bitcoin took the finance services community by storm when it reached its highest price. However, as regulators set up rules on digital currencies, its status as a safe haven currency is now being questioned.

  • The significant interest in the potential of bitcoins remains one of the key reasons behind this growing interest
  • Bitcoin prices reached $5,000 but fell almost 20% after several days
  • Chinese regulators banned initial coin offerings, branding them as unauthorised activities that may be rife with fraud

Recent growth in bitcoin prices have proved that investors are still interested in purchasing the digital asset. Prices have increased by more than 400% after starting the year at $968.23, becoming the world’s top performing digital currency. It surpassed $1,000 in January of this year and has kept climbing ever since, breaking through the $4,000 mark for the first time in August.

But after crossing the $5,000 mark on September 1 this year, an all-time high, bitcoin prices suddenly went down by almost 20%, facing its worst two days, after Chinese regulators moved to outlaw initial coin offerings.

A growing interest

There have been a growing number of mainstream investors and entrepreneurs who had recognised bitcoin as a legitimate asset class similar to stocks, bonds, or commodities. For example, billionaire Mike Novogratz, a former hedge fund manager at Fortress Investment Group and a Goldman Sachs partner who made the Forbes billionaire list in 2008, confirmed in an interview with CNN Money last April that he invested around 10% of his net worth on bitcoin and ether, which he described as the “best investment of my life.”

In July 2017, Falcon Private Bank from Switzerland introduced the first blockchain asset management, allowing wealthy clients to store and trade bitcoins using their cash holdings. The bank said that its bitcoin asset management product had regulatory approval from Swiss financial watchdog, the Financial Market Supervisory Authority (FINMA).

In Dubai, a $325 million (£ 250 million) luxury development was recently launched that will allow buyers to pay in bitcoin. Announced by British entrepreneurs Michelle Mone and Doug Barrowman, Aston Plaza and Residences spans more than 2.4 million square feet and is split across two 40-storey residential towers, which it claims the “first major development” to be priced in bitcoin.

A rising popularity

The significant interest in the potential of bitcoins remains one of the key reasons behind this growing interest. Financial markets are likely to see a large shift in the processing of transactions as the value of bitcoin rises. Digital currencies like bitcoin make it possible to eliminate certain elements of distrust in transaction that has the potential to have a significant impact on banking and payments systems.

Others believes that bitcoin works best as a medium of exchange for people living in political, unstable countries like Venezuela, with the highest inflation rate in the world. As a result, consumers want an alternative form of medium of exchange, thus making bitcoin an attractive option.

However, there has been limited acceptance of bitcoin as a payment or a medium of exchange. Businesses who would like to accept bitcoin should be internet-ready. In addition, sudden changes in bitcoin price make it more challenging to use as medium of exchange (ie. when converting the amount of local currencies to bitcoin). Bitcoin works best as a medium of exchange when doing business with others who prefer to negotiate in bitcoins, rather than using the digital currency as an alternative for something already priced in a government-sponsored currency.

In addition, initial coin offerings (ICOs) have also gained increasing popularity, becoming a new crowdfunding mechanism, wherein cryptographic tokens issued by start-ups on a blockchain or distributed ledger are sold directly to participants to raise funds for project. ICOs or the sales of new cryptographic tokens often exchanged for bitcoin then allow investors to diversify into cryptocurrency assets.

Increasing regulatory concerns

Despite creating noise in the financial services industry, many are still questioning the direction in which this digital asset will be moving, especially with growing concerns from regulators.

Just recently, the People’s Bank of China (PBOC) banned a key source of demand for bitcoin – the ICOs.

Beijing-based media group Caixin reported that the central bank publicly denounced fundraising in new blockchain-based currency, also known as ICOs. PBOC imposed an immediate ban of all currency and upcoming ICOs, branding them as unauthorised activities that may be rife with fraud.

This did not fare well with bitcoin, as prices declined to just above $4,000, equivalent to a 20% decline since an all-time high of $5,013 observed on September 1. Although, its price declined to just above $4,000 in recent days after, the currency still values four times since the end of 2016.

After China banned companies from raising money through ICOs, Hong Kong’s Securities and Futures Commission cautioned that initial coin offerings attracting investors with the promise of returns are likely to become regulated in the city. This is not the first time that regulators took action on bitcoin and cryptocurrencies. Previously, MAS said that offering or issuing digital tokens in Singapore will be regulated if the digital tokens constitute products that are regulated under the Securities and Futures Act (SFA). A week prior, US Securities and Exchange Commission clarified that depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be considered by it as securities.

Some analysts warn that prices may go down further, while others predict that bitcoin may grow as much as $10,000 next year. Sudden changes in prices show it is an extremely volatile currency.

Nevertheless, bitcoin holds much promise than digital payments and its potentials are still being explored. It essentially allows for safe and secure trading of almost anything, while also eliminating the “middle man” formerly needed to facilitate or manage the transaction. But recent developments, including regulatory actions, have ignited concerns on bitcoin that are hitting its status as a safe haven digital currency.

Categories: Financial Technology, Innovation, Markets & Exchanges, Regulation, Technology & Operations, Transaction Banking
Keywords: bitcoin, ICO, PBOC, MAS
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