It’s always been hard to predict what’s going on with cryptocurrency. Crypto has been a dark horse in investing due to its novelty and volatility. Investor sentiment is a huge part of whether crypto performs well or suffers, more than almost any other investment.
Recent weeks have been no different, but the standard’s swings have been even more dramatic in 2021 than ever before. In April, Bitcoin hit a high price of $60,000/coin before crashing down to a low of $28,000 in June. All said, Bitcoin was at its lowest level of 2021 in June, thanks to bad news from Chinese regulators and continued questions about the currency’s longevity.
A report from CryptoCompare indicates that June’s instability was likely linked most strongly to the Chinese government’s crackdown on digital currency, which erased millions of dollars in value from the crypto market. “Markets experienced mixed news — headwinds continued as China persisted with its crackdown on Bitcoin mining, while positive news arose as El Salvador became the first country to formally adopt Bitcoin as legal tender,” the report notes.
Mixed Signals Lead to Instability
Similar issues around the globe have been pushing the value of Bitcoin and other crypto standards down. For instance, Coinbase, the largest crypto exchange in the US, had a rough June. Spot trading for Coinbase was down an eye-opening 61%, casting a shadow on the fund’s future performance. And, while coin base has managed to have three successive quarters of positive financial growth, industry analysts think that this quarter is going to be different.
Another private crypto fund, Binance, has been slapped with warnings in the UK to cease all financial activity and marketing. As a result of this and general instability in Bitcoin, Binance reportedly saw 56% less spot trading of crypto in June. The UK government’s crackdown on Binance spurred fears that stricter regulations for crypto could be coming into the country, further withering Bitcoin’s price.
Similar fears are swirling in the US, where Senator Elizabeth Warren, who heads the Senate Banking Committee’s Subcommittee on Economic Policy, has suggested tighter regulations are needed for crypto exchanges. ” Demand for cryptocurrencies and the use of cryptocurrency exchanges have sky-rocketed, the lack of common-sense regulations has left ordinary investors at the mercy of manipulators and fraudsters,” Warren wrote in a letter to SEC chair Gary Gensler last week.
It’s not all bad news for crypto, though. The most bullish news for the digital standard in the last month has been the decision of El Salvador’s government, at the urging of President Nayib Bukele, to begin accepting Bitcoin as legal tender. The move surprised many in international finance, as Bitcoin is a decentralized currency that is highly volatile. It’s challenging to use as legal tender, as the wild fluctuations in its value can lead to the need for constant price adjustments on goods.
However, El Salvador’s decision to welcome crypto and its enthusiasts with open arms could be setting up a new pattern for the currency. With countries in the global South embracing the decentralized finance promises of crypto and wealthier nations drawing up regulations around it instead, a new divide could be coming between the haves and the have-nots.
Bitcoin as Currency
A perceived “problem” with Bitcoin and other crypto standards is their unique role as currency and investment. In an ideal investment, an investor’s initial buy-in would become significantly more valuable over time. However, in a perfect currency, a seller’s prices would stay roughly the same over time, and the currency’s value wouldn’t fluctuate much from week to week.
These two things are fundamentally in tension, making the mixed signals around crypto even more ambivalent for enthusiasts. News that flattens Bitcoin out and keeps it at a stable price point is good for El Salvador, as they hope to use it for exchanges. However, news that causes the currency to jump in value is suitable for investors who want to flip the currency into a profit, but not great for countries trying to use it as legal tender. When money jumps in value like that, it causes massive inflation.
The Future is Hard to Predict
Bitcoin could still go on to become a pivotal part of any diversified investment portfolio. It’s simply too soon to be able to tell with any certainty whether any cryptocurrency will be a short-lived fad or the future of finance.
However, one thing is sure: central governments in wealthy countries will continue to pressure cryptocurrency with new regulations. As long as the values of Bitcoin and other crypto standards investor sentiment-driven, such restrictions will continue to cause massive swings in value.
No one ever said investing was for the faint of heart.