Beware The Bitcoin Bounce As Regulators Pounce

I wrote an article in mid-March that stated, Why This Could Mark a Top in Bitcoin. The price went on to tumble 50% to its current levels near $30,000 due to the regulatory risks I outlined. The coin looks to have found support here but investors should remain cautious.

Bitcoin finds support at $30k

The price of Bitcoin (BTC-USD) has found support again after a second test of the $30k level and this gives hope for a recovery rally in the world’s most valuable cryptocurrency. The coin is also finding buyers despite some negative regulatory headlines, which I outline in this article.

Bitcoin is seeing a bounce in the ‘Stablecoin Supply Ratio’ oscillator, which is covered by analysts at Glassnode. The metric tracks movement out of dollar stablecoins and into BTC. When the indicator is low it is showing that traders are becoming defensive and moving into stablecoins as a safe haven.

“The Stablecoin Supply Ratio (NASDAQ:SSR) Oscillator bottomed and has been trending up in recent weeks, indicating that capital has been flowing back from stablecoins into Bitcoin,” Glassnode’s Twitter account stated.

The flow of money into BTC has indicated some significant lows in the past.

Regulators circling for the takedown

I’ve said for around two years that governments will not allow Bitcoin to usurp the current financial system. The Central Bank Digital Currencies (CBDCs) are coming and although policymakers are happy for investors to get comfortable with digital money, they are doing it to usher in their own centralized coins.

Defenders of Bitcoin say that it cannot be shut down, but they miss the point that regulators will simply make it harder and harder to see adoption in BTC.

A case in point was China’s recent ban on financial institutions trading in cryptocurrencies. China summoned officials from the country’s largest banks to a meeting to underline their position on the matter.

“Representatives from Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and payment service provider Alipay were reminded of rules that prohibit Chinese banks from engaging in crypto-related transactions,” Bloomberg reported.

That type of ban could simply be copied in the United States and Europe, removing a year of strong institutional adoption from the market. Those institutions would have done all their research and groundwork and will be in a better position to understand and adopt CBDCs.

Another sign of the collective attack on BTC was seen with the news that Japan and the UK both said that the cryptocurrency exchange Binance, shouldn’t be operating in the country. The UK’s FCA said Binance Markets Limited isn’t allowed to undertake regulated activities without written approval. The headlines followed similar statements from Japan’s regulator.

The next potential hit for Bitcoin could come in the form of a Federal Reserve takedown of the Tether stablecoin. A Senior Fed official has said that the Tether stablecoin is a threat to the financial system

In a presentation on Friday, Eric Rosengren, president of the Federal Reserve Bank of Boston, listed Tether among the key “financial stability challenges” the US central bank is watching.

“I do think we need to think more broadly about what could disrupt short term credit markets over time, and certainly stablecoins are one element,” Rosengren said. “I do worry that the stablecoin market that is currently, pretty much unregulated as it grows and becomes a more important sector of our economy, that we need to take seriously what happens when people run from these type of instruments very quickly.”

It’s interesting that the Federal Reserve official would highlight Tether individually. But the coin holds the number 3 spot in the most valuable coins with a $62bn market cap. Bitcoin has seen strong sell-offs in the past when Tether’s US dollar backing for the stablecoin was called into question.

Long-term risks are still high

With this regulatory expansion on BTC, the long-term risk is still high. Governments could also use the energy efficiency excuse to take the wind out of Bitcoin’s sail.

China recent crackdown extended into crypto mining and it is estimated that up to 90% of mining operations are now shut down. That can help the supply side of the Bitcoin price equation, but governments can also remove the demand side by blocking institutions, or pushing exchanges like Binance out of the country.

Bitcoin may see a price bounce here but it will need more than bond offerings from business intelligence firm MicroStrategy (MSTR) to save the uptrend. The company has been buying the recent lows in a self-fulfilling boost for prices, but the company could have a problem on its hands when governments decide to pull the rug.

Bitcoin is its “own worst enemy”

Cardano founder Charles Hoskinson has again been trashing the outlook for Bitcoin due to its “competitive disadvantage” in performance.

Hoskinson said in a podcast:

“The problem with Bitcoin is that it is so slow — it’s like the mainframe programming of the past. The only reason it’s still around is because there is so much invested in keeping it around.”

“It [Bitcoin] is its own worst enemy. It has the network effects, it has the brand name, it has the regulatory approval. But, there’s no way to change the system, even correcting obvious downsides in that system,” Hoskinson added.

He also added his support for Ethereum, saying, “If I had to bet between just those two systems, I’d say nine times out of ten Ethereum is going to win the fight against Bitcoin.”

Bitcoin might have a role as a means of value store but the chances of it becoming a world currency are very slim.

Underlining the points that I have made, a Bank of England spokesperson said that a UK CBDC would be much faster than BTC and could help the country reach its net-zero climate goals.

In a speech to the Future of FinTech Conference, Tom Mutton of the British central bank said:

“Bitcoin, given its performance shortcomings and energy inefficiency, is in no way a relevant comparison for the sort of technology we might use in a central bank digital currency.”

Conclusion

The increasing regulatory drive was very predictable but most analysts and cryptocurrency enthusiasts missed it. Anyone who thinks the world’s governments and central banks will step aside to let Bitcoin become a decentralized world currency is dreaming. The crackdown in China is an early sight into the plans for governments to defend their own CBDCs and there are multiple avenues to hurt the demand for BTC. Bitcoin can see a bounce here if the $30k support holds this week and the target would be resistance at $40,000. Investors should be cautious about the ongoing regulatory crackdown before going heavily long at this point.

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