Bitcoin and other cryptocurrencies are falling sharply on Friday as China has made it clear that cryptocurrency trading as well as mining are now considered illegal activities. How the move will ultimately impact the fate of Bitcoin and the rest, but for investors wondering whether or not now is the time to buy, portfolio manager Christine Poole has a suggestion: don’t bother.
Bitcoin dropped eight per cent in early trading on Friday, pulling it down to about $41,500 per coin as the markets react to news from the People’s Bank of China that it will now be cracking down on crypto trading, order matching and token issuing within its borders and will also declare illegal crypto-related services provided within China by foreign companies.
“Overseas virtual currency exchanges that use the internet to offer services to domestic residents is also considered illegal financial activity,” said the People’s Bank in a Q&A posted on its website, as reported by CNBC on Friday. “Financial institutions and non-bank payment institutions cannot offer services to activities and operations related to virtual currencies.”
Bitcoin and other coins like Ethereum were having a bounce-back year so far, with Bitcoin going from about $10,000 last September to as high as $63,500 by mid-April. Ethereum was at $357 per coin a year ago and made it to an incredible $4,168 by mid-May.
China had been the home to a big portion of cryptocurrency mining, by some accounts representing almost three-quarters of the world’s mining operations by power usage. That number fell to under 50 by earlier this year with Beijing’s crackdown on mining due to its outsized power usage and related climate change impacts. The move caused an exodus of mining operations from China.
“We know cryptocurrencies are very volatile,” said Poole, CEO of GlobeInvest Capital Management, speaking on BNN Bloomberg on Friday. “We haven’t ventured into that sector for our client accounts. We know Bitcoin peaked at just under $65,000 earlier this year and it’s down almost a third.”
“This announcement by China is somewhat surprising because they have been cracking down on cryptocurrency mining in particular because they want to decrease their carbon footprint, and now they’re saying that it’s illegal,” she said. “Many central banks have indicated they want to start to regulate cryptocurrencies so this is kind of a move in that direction. Obviously, this is going to contribute to continued volatility in all cryptocurrencies.”
Poole says China’s moves against crypto may actually drive up the price of coins in the long run.
“We know that China historically has accounted for a large portion of cryptocurrency mining because of the access to cheap energy, and miners have been slowly moving out of that country. So, in a bizarre way if supply doesn’t grow we have a very core group of people who really believe in cryptocurrency long term, so naturally scarcity may actually eventually drive it up,” she said.
“I think for cryptocurrency to really be important in our society and then to be a stable source of current currency you do need it to be widely accepted for many financial transactions. I think that’s what is at risk now with this analysis by China,” Poole said.
China’s move notwithstanding, the legitimacy of cryptocurrencies seems to be growing in the eyes of the traditional financial institutions, as more and more companies and state governments begin to accept Bitcoin transactions as legit. Just this week, Twitter announced it will allow users to send and receive money using Bitcoin, a part of the social media company’s expanded services including tipping for content creators on its platform.
“There’s this growing interest among creators to use apps that run on the blockchain,” said Esther Crawford, a product executive building Twitter’s creator features, according to a report by Bloomberg News. “We want to help creators participate in the promise of an evolving decentralized internet directly on Twitter.”
Twitter CEO Jack Dorsey is one of many strong proponents of Bitcoin and cryptocurrencies. Advocates see the tokens as ushering in a decentralized form of wealth untethered to governments and central banks.
Attractive as that may seem to some, the ability of Bitcoin to actually serve the purpose of currency for day-to-day transactions is still in doubt, while the current interest appears to be in its gold-like status as a store of value.
But even on that account, Poole says investors should tread very carefully.
“We haven’t made any investments there because I think it’s still very early innings and we don’t know how it’s going to be regulated. I think when we get more of a sense of that then maybe that’s a viable investment option,” Poole said.
“To me, if you want to put money there it’s really like gambling, so be prepared to lose it. For a retail investor, if you really feel the need to have some sort of exposure the best way is probably to buy one of these ETFs that are out there, but personally at this point we don’t recommend it for our clients,” she said.
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