After the wild first half of Bitcoin, these are the five biggest risks in the future

Bitcoin got off to a solid start until 2021 and reached an all-time high of nearly $ 65,000 in April. But digital coins closed the first half of the year, down about 47% from that record — and the number of looming risks could be even more painful in the future.

Proponents seem to hold Bitcoin for now, but other investors are wary of the intense volatility of the market and what that means for their portfolio. With that in mind, here are five of the biggest risks cryptocurrencies face as we enter the second half of this year.

One of the biggest risks of Bitcoin today is regulation.

In recent weeks, China has cracked down on the crypto industry, shutting down its energy-intensive crypto mining operations and ordering major banks and payment companies like Alipay not to trade with crypto companies.

Last week, a global crypto crackdown spread across the UK, and regulators banned major digital currency exchange Binance from conducting regulated activities.

Simon Yu, co-founder and CEO of crypto cashback startup StormX, told CNBC that China’s move should be seen as “positive” for other cryptocurrencies like Bitcoin and Ether. However, he added that cryptographic “over-regulation” in the United States can be a problem.

“As a country, the United States has too many departments to regulate it from different angles-is cryptography a security, a commodity, or a property?” Yu said. “Currently, the United States does not understand how to properly regulate the industry. This often leads to difficult decisions to operate cryptocurrencies.”

US Treasury Secretary Janet Yellen and other officials have recently warned about the use of cryptocurrencies for illegal trade.

Last year, former President Donald Trump’s administration proposed anti-money laundering rules that require people with cryptography in their private digital wallets to be identified if they make transactions of $ 3,000 or more.

“We have long warned that changes in investor sentiment and regulatory crackdowns could pop the crypto market like a bubble,” UBS wrote in a memo this week.

Another major risk is the persistent and extreme fluctuations in the prices of Bitcoin and other digital currencies.

Bitcoin recovered to a record high of around $ 64,829 in April of this year on the day of its blockbuster debut on Coinbase. After that, it fell to $ 28,911 in June, temporarily below $ 30,000, and turned negative this year. Since then, it has exceeded $ 34,000.

Bitcoin bulls see it as a kind of “digital gold.” This is an asset that is uncorrelated with the wider markers, which can bring significant benefits in times of economic turmoil. But while volatility may be good when the price of an asset is rising, it goes bidirectionally.

If you buy Bitcoin in January and cash out in April, your money will double, but today these year-to-date revenues are 18%. Still, it outperforms the S & P 500 Index, which has risen 16% since the beginning of the year. And in the last 12 months, the price of Bitcoin has more than tripled.

“A limited, highly inelastic supply in a single crypto can exacerbate volatility,” says UBS. “Limited real-world use and unusual price fluctuations also indicate that many buyers are looking for speculative profits.”

Meanwhile, the tendency of traders to bet highly leveraged on Bitcoin’s outflow from the market has led to sharp price volatility this year.

While ongoing volatility can put off some investors, Ross Middleton, chief financial officer of the decentralized financial platform DeversiFi, said that volatility itself does not prevent institutional hiring. Said.

Volatility says, “The potential for large price fluctuations means that the fund can make a big profit with a relatively small allocation compared to the size of the entire portfolio, so it is actually a big draw. It could be, “he told CNBC.

“The longer Bitcoin moves sideways in the $ 30,000 to $ 40,000 range, the greater the perceived” foundation “, and new capital is both assets and the wider crypto market,” Middleton said. It will flow into the market sooner. “

Musk’s electric car company surprised both Bitcoin fans and skeptics when it bought $ 1.5 billion worth of digital currency this year and began accepting it as a payment method. However, he subsequently shook the crypto market after deciding to stop paying Bitcoin due to the currency’s “insane” energy use and reliance on fossil fuels.

It raises some questions for asset managers who are under intense pressure to limit their investment in ethically conscious assets.

“At least some investors may be discouraged from holding Bitcoin,” Citi analysts said. “As seen in some parts of China, government intervention to ban mining. It could “accelerate”, he added.

So-called stable coins, whose prices are intended to be fixed to real-world assets such as the US dollar, are also being scrutinized more and more.

Last week, Federal Reserve Bank of Boston Governor Eric Rosengren said tether, a stable coin ranked as one of the world’s largest digital currencies, is a risk to the stability of the financial system.

Tether claims that each of its tokens is backed 1: 1 by the US dollar held in reserve, which is the idea of ​​keeping prices stable. Cryptocurrency investors often use tethers to buy cryptocurrencies instead of greenbacks, but some investors have enough dollars for tether issuers to justify dollar pegs. I’m worried that I don’t have a reserve.

In May, the company behind Tether disassembled the stable coin reserve and revealed that about 76% was backed by cash and cash equivalents, less than 4% of which was actual cash. And about 65% was commercial paper. Short-term debt.

Tethers are compared to traditional money market funds, but they are unregulated. It has $ 60 billion worth of tokens in circulation and has more deposits than many US banks.

There has long been concern about whether tethers are being used to manipulate Bitcoin prices, and one study found that tokens were used to support Bitcoin during a major price decline at the 2017 Monster Rally. Claims to have been done.

“Tether is a big problem,” Professor Carol Alexander of the University of Sussex told CNBC. “”Regulators don’t seem to be able to stop them for now. “

“Traders need a tether to open and trade accounts, or other cryptocurrencies. However, most large traders are based in the United States, so tether is a natural choice.”

Increasing speculation in the crypto market could prove another risk for Bitcoin.

Dogecoin, a cryptocurrency that started as a joke, hit a record high as it surged earlier this year and the number of retail investors piled up on digital assets in search of large profits increased.

At some point, Dogecoin was more valuable than Ford and other major US companies. This is thanks to the support of celebrities like Musk. Since then, its value has fallen sharply.

Elsewhere in the crypto market, decentralized finance, or tokens called DeFi, titan, crashed to zero. The owner was Mark Cuban, a self-made billionaire investor.

“Another concern is the number of scams that have occurred throughout the year,” said Yu of StormX. “With certain meme coins, we’ve seen a lot of pump and dump activity and we’ve seen individual investors get burned.”

“Whenever the retail industry burns out, the government intervenes, and as we saw in 2018 and the ICO (Initial Coin Offering), some over-regulation can have a negative impact on the industry as a whole. . “