Regulation, exchanges, lending and the competing cryptocurrency Tether are the main risks Bitcoin faces this year as it declines from its inflated highs in 2017, according to Julian Hosp.
Bitcoin has lost nearly $ 10,000 in value in the last month alone as investors reach for what they see as the next crypto trend.
With the entire cryptocurrency market at a staggering $ 563 billion and seeing an increase of over 3,400 percent since January 2017, crypto expert Hosp still has hope for the industry as it moves towards mainstream adoption.
However, investors should be aware of the risks currently hanging over the markets, according to Hosp, who wrote on CNBC.
Against a backdrop of regulatory threats to the EU, South Korea and China, the risk of cryptocurrencies losing momentum while embroiled in regulatory bureaucracy remains very real.
South Korean leaders have long pondered the perceived threats digital assets could pose to national economic stability.
Earlier this month, Justice Minister Park Sang-ki prepared a law for the government to shut down all of the country’s stock exchanges, which put prices into free fall.
Senior Official Jung Ki-joon said: “The proposed closure of exchanges that the Justice Minister recently mentioned is one of the measures proposed by the Justice Department to curb speculation.”
While a number of national regulations around the world might not pose long-term risk, Hosp said, “If regulators in the US, Europe or elsewhere banded together and banned exchanges and other companies providing services to the crypto ecosystem, it would have a major impact on the.” Cryptocurrencies themselves. “
But the global community of digital currency users is surprisingly robust. When China banned all initial coin offerings and Bitcoin exchanges in the first week of September last year, despite the ban causing a short-term decline in cryptocurrency flows around the world, the market had made a comeback on September 24th.
Regarding the China ban, Hosp said: “People and companies have just moved elsewhere. And instead of the market collapsing, it recovered.
When asked whether or not US or European bans would have a more dramatic impact on the lifespan and price of Bitcoin, Mr. Hosp said, “I’m pretty sure they would, but how likely is the whole scenario a ban on cryptocurrencies by one of the great western economies? ?
“After repelling this idea from a lot of people I trust, I would give it a 10 percent chance in 2018, which translates into a drop of about 50 percent from the top of the market.”
Cryptocurrency exchanges represent the point that most bitcoins pass when buying and selling. In the early days of Bitcoin, one exchange dominated the community – the now infamous Mt. Gox.
However, since Mt. Gox crashed in 2014, which triggered an 80 percent drop in prices, the money flowing through the exchanges has now been thinned out on a selection of smaller exchanges.
After learning from the Mt. Gox meltdown, no exchange now owns more than 10 percent of the market.
For most newbies to the world of bitcoins and digital currencies, however, Coinbase is the first entry point that brings much of the new money into the crypto world. Over 13 million accounts, and the number is rising.
Mr. Hosp said: “Coinbase and its backend solution Gdax are one of the largest exchanges for bringing fresh fiat money into the ecosystem. It also has some of the largest user bases in the world.
“One of the largest exchanges by trading volume is the only 6-month-old Binance exchange, which sometimes adds over 200,000 new users an hour.”
Mr. Hosp asks the question: “What if Coinbase goes under and fresh money dries up? What if the extremely young Binance exchange encounters problems? “
He predicts the probability that a large stock exchange will get into serious problems in 2018 at around 25 percent – which will result in a decline of 10 to 15 percent.
One of the top search terms on Google during the price increase last December was “Can I buy Bitcoin with a credit card”. The top location for this search was Nigeria. Bitcoin’s price has fallen sharply since that date, and those credit card bills eventually have to be paid.
Mr. Hosp gives the worst-case scenario associated with this credit risk a probability of 20 to 25 percent with a decline in the crypto market value of 5 to 10 percent.
It is uncommon for concerns to be raised that a single cryptocurrency is being classified as a risk to the entire digital currency family.
However, according to Mr Hosp, the Tether threat is so serious that it can be considered risky enough to be heralded as one of the potential pins that could one day burst the Bitcoin bubble.
Tether is controversial because its price is “pegged” to the dollar. Tether transactions take place at a rate that is fixed in the US dollar. The founder believes this will allow the currency to avoid government interference and regulatory oversight.
Jacob Frenkel from JP Morgan: Bitcoin should be regulated
But when it comes to market cap (the total value of each token in circulation), a given cryptocurrency might have a market cap of $ 100,000,000, but in reality there is only $ 500,000 of real money – dollars, pounds and euros – in that 100,000. 000 USD flowed and most of this value was amassed by daily price increases.
Tether is different because its market cap of $ 1.6 billion means $ 1.6 billion has gone into it.
The purported and wholly hypothetical risk here is that prices would plummet, possibly to zero, if the market were scared that there was actually no $ 1.6 billion support for the token.
Hosp said, “I only estimated that probability at about 10 percent this year, but I think it would cut the market by about 10-15 percent.”
The author says a single trigger would not have much effect, “but many of the possibilities are interrelated”.
He said, “If a domino starts to fall, it could bring down others – and the probabilities start adding up, potentially dropping the market by the same 80 percent as Mt. Gox did in 2014.”