Nick’s Note: If you follow the headlines, you’re probably worried about the volatility currently roiling the cryptocurrency market. That’s why I got on the phone with PBRG guru Teeka Tiwari… I wanted to get the real scoop.
Teeka says the mainstream media is missing the bigger picture: The outlook for this emerging asset class is still bright. And he tells me big developments are going on behind the scenes to bring cryptocurrencies into the mainstream.
Nick: T, there’s been a lot of volatility in the crypto market lately. What’s behind it?
Teeka: It’s really a bunch of bad news all coming out at once. In the past couple of weeks, India, China, and South Korea made announcements about regulating cryptos…
Last month, a Japanese exchange lost $500 million worth of cryptocurrencies to a hack…
Federal regulators have launched an investigation into Tether—the one cryptocurrency pegged to the U.S. dollar.
Plus, there was a lot of fear about Congressional hearings on cryptocurrencies. (More on this in a moment; it’s big.)
On top of that, major banks put restrictions on buying cryptos with credit cards.
All that negative news combined to create a lot of uncertainty in the markets. That made people nervous. And that’s why we’ve seen a lot of selling.
Nick: The credit card ban seemed to especially rattle the market. What happened?
Teeka: Earlier this month, Mastercard and Visa made it harder to buy bitcoin by classifying bitcoin purchases as cash advances instead of charges. The difference is important. A cash advance incurs costs and interest the moment you make it. A charge is interest-free for 30 days.
The top five credit card issuers—Bank of America, JPMorgan, Citigroup, Discover, and Capital One—have taken things a step further… They’ve banned the purchase of bitcoin on credit outright.
Although I think people should be able to do whatever they want with their own money, it’s crazy to purchase bitcoin on credit.
But I do recognize that some folks have used credit cards in lieu of cash to buy bitcoin because it’s faster. Then they pay off the cards immediately.
That’s a responsible use of credit.
However, some folks have been borrowing on credit cards with the hope of “flipping” bitcoin at higher prices. Now that bitcoin has dropped 60%, they’re horribly upside down.
(Friends, I implore you… please don’t speculate in cryptocurrencies with money you can’t afford to lose.)
I’m sure panic selling by “upside-down” credit card buyers was behind some of the downside volatility we’ve seen lately.
Nick: So, a cascade of bad headlines is behind the recent volatility. But now you say there’s some good news coming out of Congress. What is it?
Teeka: Yes. On Tuesday, the Senate Banking Committee held hearings on cryptocurrencies.
They heard testimonies from Jay Clayton, the head of the Securities and Exchange Commission (SEC)… and Christopher Giancarlo, the head of the Commodity Futures Trading Commission (CFTC).
Many in the crypto space had prophesied the hearing would spell regulatory doom for cryptos.
The reality was quite different…
The hearing went very well. And that should finally make crypto investors realize that neither the SEC nor the CFTC wishes to destroy cryptos.
Both agency heads said that more work needs to be done to create a new regulatory framework to account for the unique properties of these assets. They went on to say they would assume a “do no harm” policy approach.
That means their focus is on nurturing the sector… not stifling it.
Nick: You’ve said in the past that a regulatory framework would be good for cryptocurrencies (see here). Why’s that?
Teeka: A framework would help bitcoin continue to move from this kind of shadowy place in the financial world to a place where it has widespread acceptance.
The primary concern for regulators isn’t a ban on cryptocurrencies… They just want to root out—and prosecute—fraudulent coins and unregulated initial coin offerings (ICOs) that are really securities masquerading as exempt “utility tokens.”
It’s clear to me that U.S. policy is supportive of cryptocurrencies, crypto assets, and blockchain technology in general.
After all, if they really hated this tech, why didn’t they say something to the effect of, “This is a toxic asset class and we won’t allow it to be part of the U.S. financial system”?
They didn’t say that… and that’s hugely bullish.
Nick: What did they say?
Teeka: Giancarlo said, and I quote, “We owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balanced response, and not a dismissive one.”
Clayton was bullish, too. He said he hopes people “vigorously” pursue blockchain technology.
Clayton also said he’s “open” to working with U.S. lawmakers and state regulators to develop new rules for crypto exchanges.
One committee member, Senator Mark Warner of Virginia, even said, “The potential writ large amongst crypto assets and the underlying blockchain could be as transformational as wireless was years ago.”
Nick: What about the recent volatility? Are they concerned about that?
Teeka: When asked about volatility, Giancarlo pithily commented, “Bitcoin’s volatility is an issue, but volatility exists everywhere.”
And Clayton said, “The volatility in bitcoin was not as great as the volatility we’ve seen in other securities.”
For instance, Clayton told the committee that the CBOE Volatility Index (the VIX, Wall Street’s “fear gauge”) spiked nearly 116% on Monday, when the Dow pulled back.
On Tuesday, it rose as much as another 37% to its highest point in years—only to end the day down almost 20%. That was its widest swing in history.
Nick: That makes sense… Volatility exists in every asset class. So, what’s your takeaway from this hearing?
Teeka: The key takeaway is that regulators are looking for ways to bring crypto assets into the regulatory fold… My sense is that they want Congress to help them by passing laws that will enable an orderly framework for these assets to flourish.
They’re not trying to ban cryptos. They’re welcoming the asset class and helping it mature.
Nick: Thanks T. That news does sound bullish for cryptocurrencies.
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