Re-entering the World of Bitcoin
Last spring, I wrote an article about the current state of Bitcoin and my projections for its future. In that article, I deduced that due to projected regulations and general inconsistencies, Bitcoin would crash. My predictions about future Chinese regulations impacting the value of Bitcoin were correct, as a month after my article got published, "China's Crypto wiped out nearly $300 billion in market value" (Pound 2021). Although I correctly predicted this unprecedented crash in Bitcoin's value, it has recently bounced back, breaking its own record high market evaluation. This article details the foundation for Bitcoin's rebound and the looming threat of another round of regulations and opponents.
One of the most prominent reasons for Bitcoin's rebounding from its June 2021 record low was the American Government's continued lack of cryptocurrency regulations. According to CNBC journalist Tanya Macheel, the "Senate further delayed the vote on the infrastructure bill to Tuesday to allow for more time to debate two competing amendments to a cryptocurrency tax provision" (Macheel 2021), eventually leading to "a compromise amendment" (Macheel 2021). This compromise amendment decreased the potential taxing of Bitcoin transactions, giving hope to many "whale investors" (investors with a substantial amount of capital). These whale investors then doubled down their investments in Bitcoin, pouring in enough money to start the coin's run. Bitcoin's value further increased by new senators who have begun to take pro-crypto stances. For example, "Sen.s Ron Wyden (D-Ore) and Ted Cruz (R-Texas) have joined crypto advocates Sen. Cynthia Lummis (R-Wyo)" (Macheel 2021). Cryptocurrency's ability to align law-forming representatives from both parties has already lubricated the voting process (see the compromise amendment) and strengthened the public's support of this seemingly unpredictable coin.
Bitcoin's rise in value does not rebut or undermine my previous prediction's logic; in fact, it confirms it. America is yet to deploy any regulations against bitcoin. Delaying regulations such as controlling the price of fiat currencies, increasing exchange transaction fees, and creating import restrictions have resulted in a heavy reinvestment into the cryptocurrency. Last March, American officials promised these regulations, informing my previous predictions about Bitcoin's failure and making the fact that Bitcoin is now worth over 61,000 per coin an almost unbelievable concept. Although these regulations became delayed, it does not change the logic behind predicting Bitcoin's future. The future of crypto lies in the hands of governments, as their rules will determine the coin's trajectory. At this point, predicting Bitcoin's future value is aligned with one's ability to read the minds of governments through published statements and actions. For example, China's consistency with regulation allows citizens to predict Bitcoin's future value confidently.
China continues to regulate cryptocurrencies with no sign of slowing. Although this continuation may not surprise most in the cryptocurrency sphere, Bitcoin investors should be worried about similar bans across multiple national entities. CNBC journalist Taylor Locke explains that China has recently announced a "stricter banning of cryptocurrency" (Locke 2021), entailing more significant measures to monitor all cryptocurrency-related activity. She also writes that although this increase of bans will not change much in China, investors should be worried about the "potential fallout from [reactive] U.S. regulation" (Locke 2021). Luckily, for cryptocurrency investors, the U.S. might avoid reactively regulating.
As stated before, Bitcoins price is likely tied directly to regulatory measures, and the American Government has continually sent mixed signals about cryptocurrency regulation. Amid these mixed signals, NextAdvisor journalist Ryan Haar explains what everything means for Bitcoin investors. Although Bitcoin's decentralization and anonymity directly oppose what the American government wants, "the government is not too worried about crypto's founding principles" (Haar 2021). Haar reports that U.S. Federal Reserve Chairman Jerome Powell said he has "no intention of banning crypto-currency" (Haar 2021). While it is natural to over-assess Bitcoin's value after comments such as these, they require deeper analysis.
Although Powell promised not to ban cryptocurrency outright, he wants to mix government influence into this decentralized coin to stop crypto tax evasion and add crypto investment vehicles such as crypto ETFs. America's intervention is another scheme to make more money for the government: adding crypto ETFs grants the government an opportunity to tax the buying and selling of the coin and those who trade these securities. While these additions are entirely restrictive, they infringe on the entire point of the currency: being decentralized. If cryptocurrency investors care about decentralization, government intervention should immensely lower their interest in Bitcoin. In sum, even these minor governmental regulations of cryptocurrency can destroy the value of Bitcoin. On the chance Powell is replaced by his most significant competitor, Lael Brainard, nothing would change as she holds the same belief that "a cryptocurrency backed by the central bank could provide a variety of benefits" (Cox 2021). Essentially, regardless of Biden's choice of Federal Reserve Chair, the stance on cryptocurrency should remain consistent.
Another wrinkle the U.S. government has thrown into Bitcoin's value is stablecoin, a cryptocurrency of sorts. The American government's latest venture is a government-issued stablecoin. Stablecoin, "a bridge between cryptocurrency markets and the traditional economy" (Lipton, Livni, and Smialek 2021), is taking over Washington by storm. Stablecoins are essentially the digital dollar. They operate like Bitcoin but are backed by the U.S. government; stablecoins let citizens invest in cryptocurrency without worrying about the volatility of currency like Bitcoin. The growth of these stablecoins is among the likes of Bitcoin, as stablecoins grew "$30 billion in January to $125 million in mid-September" (Lipton, Livni, and Smialek 2021). Ignoring stablecoin's competition-based devaluing of Bitcoin, the very concept of stablecoin threatens the existence of decentralized cryptocurrencies like Bitcoin.
While supporters of Bitcoin argue that the government cannot tax something they cannot monitor, they are ignorant of the power of Washington. The government has set it up so that buying and selling cryptocurrency goes through trading platforms that 1) must adhere to U.S. law and 2) are easily taxable. America's plan to add even more crypto-investment vehicles will give the government more control over the cryptocurrency market. Expanding the definition of a brokerage to include "companies that facilitate digital-asset trading" (Haar 2021) allows for the U.S. government to, in fact, tax these "anonymous" transactions.
When predicting the short-term future of Bitcoin, one must keep both China's and America's regulations in mind. The mix of China's consistent laws along with America's dedication to stablecoins leads me to believe that Bitcoin will soon crash once again. At the same time, this prediction is limited by the belief that governments are a consistent force, which America has not proven to be. If the world's governments do act in parallel with their promises, though, we will soon see another major crash in Bitcoin.
References
Cox, Jeff. 2021. “Fed’s Lael Brainard Pushes Digital Dollar as Central Bank Currency Race Heats Up.” CNBC. https://tinyurl.com/bec3zdaz.
Haar, Ryan. 2021. “U.S. Officials Send Mixed Messages on Crypto Regulation. Here’s What ItAll Means for Investors.” NextAdvisor.
https://time.com/nextadvisor/investing/cryptocurrency/crypto-regulation-talks-heat-up/.
Lipton, Eric, Ephrat Livni, and Jeanna Smialek. 2021. “Regulators Racing Toward First Major Rules on Cryptocurrency.” New York Times. https://tinyurl.com/dnrw83dm.
Locke, Taylor. 2021. “China is Cracking Down on Crypto Again -- Here’s What That Actually Means, and How it Affects U.S. Crypto Investors.” CNBC. https://www.cnbc.com/2021/09/24/what-investors-should-know-about-chinas-cryptocurrency-crackdown.html.
Macheel, Tanaya. 2021. “Bitcoin Retakes $46,000 as Rebound Continues.” https://tinyurl.com/xmr52u4j.
Pound, Jesse. 2021. “Bitcoin Turns Positive on Day in Wild Session Where It Briefly Dropped Below $30,000.” CNBC. https://tinyurl.com/pjk9r6cm.