By any measure, Bitcoin has long been the industry leader, conversation starter, and dominant power in the capital markets, ever since blockchain and crypto were part of the conversation. With a market capitalization of over $1 trillion, major purchases by household names such as Tesla TSLA -1 percent, and crypto payments becoming available through major payment processors, it is reasonable to conclude that bitcoin supremacy is all but assured Bitcoin Evolution.
However, ether and the Ethereum blockchain have quickly risen in terms of crypto valuation and the other applications built on this blockchain. Taking a step back and ignoring the price tracking that captivates market observers and participants every day, ether and Ethereum has become the dominant narrative in the second half of 2020 and 2021.
Why Is Bitcoin’s Price Rally Special This Time?
A majority of analysts agree that the latest Bitcoin boom (November 2020) bears no resemblance to the currency’s notorious December 2017 surge, when it shattered all previous records.
Many that jumped into the iconic Bitcoin rally of the winter of 2017 were let down when the asset collapsed shortly afterward. Some, however, suggest that the previous rally was mostly facilitated by private investors, rather than institutional funding for the currency. When the individuals cashed out, the value of Bitcoin plunged.
Bitcoin is now being marketed and funded by institutional investors. Large institutions such as Fidelity Investments, JP Morgan, and PayPal are making inroads into the cryptocurrency room. Fidelity has its own digital asset division, JPM has launched its internal digital coin, and PayPal will begin accepting payments from cryptocurrency wallets next year. New institutions, like Protego Trust Bank, have emerged as well acting solely as a digital asset bank for institutional clients. Furthermore, prominent Wall Street hedge fund managers such as Paul Tudor Jones have shown an interest in Bitcoin. Jones has also indicated that Bitcoin would serve as an anchor to save us from devaluing our currencies, close to how the gold standard served in the 1970s.
Risks of Cryptocurrency in Future
The spectacular surge in Bitcoin’s price and the growing adoption by the mainstream financial industry, including legacy establishments such as Visa, MasterCard and BNY Mellon, has had investors rushing to crypto exchanges to grab a piece of the digital currency action.
While the stratospheric rise in Bitcoin prices and wild media headlines have whipped up a Fomo frenzy, the fundamentals of investing haven’t changed. The same investing rules and due diligence apply to Bitcoin as any other asset class.
One of Bitcoin’s big threats is that it remains very unpredictable. It can rise quickly and then fall in a matter of weeks, days, or even hours. Furthermore, security risks such as a 51 percent strike, in which miners gain majority control and block transactions, will occur.
1: Price volatility risk
Bitcoin’s price is vulnerable to wild swings. The sector is highly vulnerable to news and technological technologies, resulting in regular and unpredictable upswings and downdrafts in the price of the digital currency. “Bitcoin is likely to remain extremely sensitive to changes in global interest rates, especially US interest rates, as well as the wider dollar exchange rate,” says Arnab Das, global market strategist at Invesco.
Furthermore, Bitcoin’s claimed aim – a transactional asset – is of little utility. “Price instability makes it more difficult to purchase and sell goods,” says Kristoffer Inton, an equity analyst at Morningstar.
2: Loss of demand risk
Bitcoin, as a comparatively young commodity and technology, could be some time away from mainstream adoption. Bitcoin’s market and use are determined by the underlying technologies. According to Mitchell Yousem, a financial analyst based in New York, the technology must first reach a point where it can be trusted by major risk-averse institutional investors and other organizations.
“Right now, real-time technologies and networks are lagging, and there have been problems that aren’t really related to crypto or BTC,” he adds, pointing to times where automated banks and trading platforms couldn’t manage incremental changes in trade volumes.
3: Cybersecurity risk
Hacker attacks have resulted in millions of dollars in stolen digital coins, including Bitcoin. As Mt Gox demonstrated, cyber protection is a real concern associated with Bitcoin.
The Tokyo-based Bitcoin exchange was the victim of a multimillion-dollar scam, highlighting the dangers of the insecure digital wilderness. “A lot of coins were lost or stolen, and there isn’t much an investor can do about it,” Mr Inton says. “A commodity based on encryption, such as Bitcoin, makes it especially appealing for cyber attacks.”
Businesses Dealing with Cryptocurrencies
Given the severe legal and financial ramifications of non-compliance with legislation, it is important for companies to consider, track, and meet their regulatory obligations. All agencies concerned with cryptocurrencies shall adhere to the registration, licensing, and reporting standards in an effective, timely, and efficient manner.
Sia Partners is able to support customers with regulatory mandates and help handle all aspects of enforcement needs for crypto-dealing firms, thanks to our vast regulatory compliance expertise, which includes former US regulators on board. Sia Partners stays up to date with both state and federal legislation pertaining to cryptocurrencies in order to provide clients with the right policy and regulatory solutions that are consistent with their business plans. If you need any additional details, please email your Sia Partners contact.
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