KEY POINTS
Bitcoin saw a solid start in 2021. It reached an all-time high at nearly $65,000 in April.
It ended the first half of this year with a decrease in revenue of 47% compared to its previous record.
There are many looming dangers that could cause more pain.
Bitcoin saw a strong start to 2021 with an all-time high of almost $65,000 in April. The digital coin ended the first half of 2019 with a 47% drop from its previous record. There are a few looming risks that could cause further losses.
Proponents seem to be keeping bitcoin, but other investors are concerned about wild volatility in the market and how it will affect their portfolios. Here are five major risks to cryptocurrency in the second half.
Regulation
Regulating bitcoin is one of the greatest risks right now.
China has taken steps to curb its cryptocurrency industry in recent weeks. It shut down crypto mining operations that are energy-intensive and ordered major banks and payment companies like Alipay to stop doing business with crypto companies.
The global crypto crackdown reached the U.K. last week. Regulators banned Binance, a leading digital currency exchange, from engaging in regulated activities.
CNBC's Simon Yu, co-founder, and CEO at crypto cashbackstartupStormX, said that China's actions should be considered a "positive" for bitcoin and another cryptocurrency like ether, as they will encourage more decentralization. He warned that the United States might be too strict with crypto regulations.
"As a nation, the U.S. has too many departments regulating it in different angles -- is crypto security? Is it a commodity? Yu stated. "At the moment, the U.S. hasn’t figured out how to regulate the industry properly, which oftentimes leads crypto operators to make difficult decisions."
Janet Yellen, U.S. Treasury Secretary, and other officials recently warned against the illicit use of cryptocurrencies.
The administration of former President Donald Trump proposed an anti-money laundering rule. It would require crypto holders to go through identity checks when they make large transactions exceeding $3,000, and it would apply to anyone who has their digital wallet in private.
UBS said in a note this week that they have warned for years about shifting investor sentiment and regulatory crackdowns. This could lead to crypto markets popping like a bubble.
Volatility
A persistent and extreme swing in bitcoin's price or other digital currencies is another risk.
Bitcoin rose to an all-time record of $64,829 in April, the day of Coinbase's blockbuster debut. The price plummeted to $28,911 by June and briefly fell below $30,000 before turning negative for the year. It's since risen back above $34,000.
Bitcoin bulls view it as a type of "digital gold", an asset that is not correlated with the larger marker and could yield substantial returns during times of economic turmoil. Volatility can be good when an asset's price is rising, but it can also work in the opposite direction.
You would have doubled your money had you purchased bitcoin in January and cashed it out in April. However, these year-to-date returns are only 18%. This is still higher than the S&P 500 index's 16% increase since the beginning of the year. Over the past 12 months, bitcoin's price has more than tripled.
UBS says that a limited, highly elastic supply of single cryptos can increase volatility. "Limited real-world use and extreme price volatility are also indicators that many buyers are looking for speculative gains ."
Nevertheless, intense price fluctuations have been caused by the high-leverage bets made by traders on bitcoin's eventual disappearance from the market.
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Although continuous volatility can be a concern for some investors, Ross Middleton (chief financial officer at DeversiFi), said that it is not a barrier to institutional adaptability.
He said that volatility "can be a major draw" because of the potential for large price moves. This means that funds can make substantial profits with a relatively low allocation relative to their overall portfolio.
Middleton said that Bitcoin's movement in the $30-40k range is a sign of a greater 'base-building perception and that more capital will be available to invest in the asset.
Environmental concerns
Another potential problem for bitcoin could be its impact on the environment.
The electricity required to operate bitcoin mining equipment is enormous. Bitcoin's energy consumption has increased significantly over time in line with its price.
Although bitcoin has been criticized for its large carbon footprint, Elon Musk, Tesla CEO, brought it back to the forefront this year.
Why does Bitcoin consume so much energy?
Musk's electric car company stunned bitcoinskeptics and fans this year by purchasing $1.5 billion worth of digital currency and accepting it as payment. However, he caused a stir in crypto markets when he decided to stop bitcoin payments because of the currency's "insane energy use" and dependence on fossil fuels.
Asset managers are now under greater pressure to invest only in ethically conscious assets.
Citi analysts wrote earlier this year that it might deter some investors from holding Bitcoin. They also added it could "spur government intervention" to ban mining as was seen in China.
Stablecoin inspection
Stablecoins, which are supposed to be tied to real-world assets such as U.S. dollars, are also under increasing scrutiny.
Eric Rosengren, President of Federal Reserve Bank of Boston, stated last week that tether, which is a stable coin and ranks among the largest digital currencies in the world, poses a threat to the stability of financial systems.
Tether claims that all its tokens are backed by U.S. Dollars in a reserve. This is to ensure that the price stays stable. Tether is often used by crypto investors to purchase cryptocurrencies. However, some investors are concerned that tether's issuer may not have sufficient dollar reserves to support its dollar peg.
Tether is the third-largest cryptocurrency in the world. What should you know?
The company behind tether revealed that 76% of the reserves were backed by cash and equivalents. However, just under 4% was actual cash. While 65% of the total was commercial paper, which is a form of short-term debt.
Tether has been likened to traditional money-market fund funds, but without regulation. It has almost $60 billion in total tokens and has more deposits than many U.S. banks.
There has been a concern for some time about whether tether could be used to manipulate bitcoin prices. One study claims that the token was used as a supported currency during bitcoin's massive rally of 2017.
CNBC's Carol Alexander, professor of finance, said that "Tether" is a huge problem."Regulators are unable to stop them.
To trade and open accounts, traders need to have a tether. Or any other crypto. Tether is the obvious choice, as most traders are based in the U.S.
Scams and 'Meme Coins'
Bitcoin could be at risk from rising speculation on crypto markets.
Dogecoin, which started as a joke cryptocurrency, surged to new heights earlier in the year as growing numbers of retail investors invested in digital assets in pursuit of huge gains.
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Dogecoin was once worth more than Ford or other major U.S. companies. This was due in large part to the support of celebrities such as Musk. Since then, its value has declined significantly.
A token known as a titan, which is a Decentralized Finance, or DeFi, token, crashed to zero elsewhere in the crypto market. Mark Cuban, a self-made billionaire investor, was a holder.
StormX's Yu stated that another concern was the increasing number of scams appearing throughout the year. "We've seen many pump-and-dump activities with certain meme coins and we've seen retail investors get burned."
The government is there to help retail when they are getting burned. The government can also intervene if the regulations are too strict, as was the case with 2018 and ICOs (initial coins offerings). This could have a negative impact on the entire industry.
