Crypto Winter Arrives: Global Regulation Tightens, Bitcoin Falls Below $35,000

Crypto Winter Arrives: Global Regulation Tightens, Bitcoin Falls Below $35,000For investors familiar with cryptocurrencies, they are accustomed to the ups and downs of Bitcoin. So far in 2022, Bitcoin has been struggling to stay above $36,000

Crypto Winter Arrives: Global Regulation Tightens, Bitcoin Falls Below $35,000

For investors familiar with cryptocurrencies, they are accustomed to the ups and downs of Bitcoin. So far in 2022, Bitcoin has been struggling to stay above $36,000. On January 23rd, Beijing time, Bitcoin fell below $35,000 per coin, reaching a new low since September 2021. Coindesk data shows that as of 8:14 PM Beijing time on January 23rd, Bitcoin was trading at $35,636.13 per coin, down nearly 20% over the past week and nearly 30% since the beginning of the year. As of 8:12 PM Beijing time on January 23rd, Bitcoin experienced $1.75 million in liquidations within one hour, $7.47 million in liquidations within four hours, and $20.07 million in liquidations within 12 hours.

In fact, since hitting an all-time high of $68,928.9 per coin on November 10th last year, Bitcoin has entered a volatile downward channel, falling over 40% and experiencing the longest sustained decline since 2018. Several market analysts have attributed this decline to the Federal Reserve's tightening monetary policy, the widespread sell-off of tech stocks, and increased global regulation targeting Bitcoin from mining and trading to online marketing.

A New Wave of Global Regulation

The new year seems to bring intensified global regulatory pressure on cryptocurrencies. On January 17th, local time, after a controversy involving influencers promoting cryptocurrencies on social media, Spain's National Securities Market Commission (CNMV) announced it would impose restrictions on public figures promoting cryptocurrencies, making Spain the first country in the European Union to take such measures. Specifically, the CNMV requires influential individuals and sponsoring companies to submit notices at least 10 days in advance of promotional campaigns and to issue warnings about the risks associated with cryptocurrencies, or face fines.

"If the influencers' promotional activities are not covered by regulation, it creates a loophole. This is a new area for us and for them, and friction will inevitably arise, but friction always occurs when rules are introduced for areas that were previously unregulated," said Rodrigo Buenaventura, head of the CNMV, in an interview with the media.

Almost at the same time, the Monetary Authority of Singapore (MAS) also imposed restrictions on cryptocurrency promotional activities. "Recently, some DPT (Digital Payment Token) service providers have actively promoted their services online or in public areas. This could lead consumers to impulsively engage in DPT transactions without fully understanding the associated risks. The new guidelines clarify the Monetary Authority of Singapore's expectation that DPT service providers should not engage in marketing or advertising of DPT services." MAS stated that DPT service providers can only market or advertise on their own corporate websites, mobile applications, or official social media accounts.

Two days later, on January 19th, local time, the UK's Financial Conduct Authority (FCA) proposed reforms to rules related to the public sale of high-risk investments to address associated financial risks. "Too many people are being drawn into investing in products they don't understand, products that are too risky for them," said Sarah Pritchard, Executive Director of Markets at the FCA. The reform proposals include details of how financial regulators will manage cryptocurrency advertising. Previously, the UK Treasury had announced that it would include regulation of digital token promotions within the FCA's responsibilities.

In contrast, Russia has taken a stricter stance on cryptocurrencies. On January 20th, local time, the Bank of Russia announced that it would propose a ban on cryptocurrency trading and mining, aiming to eliminate all cryptocurrency-related businesses within the country. The Bank of Russia pointed out that the share of cryptocurrency payment transactions compared to traditional payment systems is negligible. However, due to the anonymity of transactions, currency substitutes are widely used in illegal activities.

"Currently, the involvement of traditional financial intermediaries in the cryptocurrency market is limited, but the trading volume of cryptocurrency derivatives and exchange-traded funds (ETFs) related to cryptocurrencies is growing, and the decentralized finance (DeFi) ecosystem is evolving." "In the long run, the potential for using cryptocurrencies for settlement seems limited." The Bank of Russia pointed out that the rapid growth in the market value of cryptocurrencies like Bitcoin is primarily driven by speculative demand and expectations of further price increases, which has led to the formation of bubbles in the market.

The Bank of Russia further pointed out that, like dollarization, cryptocurrencies restrict monetary policy sovereignty, which could force the central bank to maintain permanently higher key interest rates to curb inflation. This would reduce affordability of credit for households and businesses. "For emerging market economies, including Russia, the potential financial stability risks posed by cryptocurrencies are much higher, especially due to the traditional tendency towards dollarization and insufficient financial literacy."

To mitigate the threats associated with the expansion of cryptocurrencies, the Bank of Russia will propose a ban on the issuance and circulation of cryptocurrencies within the Russian Federation, including cryptocurrency exchanges and P2P platforms; prohibiting financial institutions from investing in cryptocurrencies and related financial instruments, as well as using Russian financial intermediaries and financial infrastructure for cryptocurrency trading; and prohibiting certain types of cryptocurrency mining activities.

However, Elizaveta Danilova, Head of the Financial Stability Department at the Bank of Russia, stated that Russians would still be allowed to hold cryptocurrencies abroad, and those with offshore foreign exchange accounts would be able to trade cryptocurrencies. At the same time, she warned that regulators would track the holdings of domestic investors. "It is crucial to prohibit the use of Russian financial infrastructure to access cryptocurrencies. We believe this will help eliminate a significant portion of the risks and ensure that the cryptocurrency hype cools down."

It's worth mentioning that developed economies, led by the United States, have been relatively lenient towards cryptocurrencies. But the US Securities and Exchange Commission (SEC) has made it clear that cryptocurrency exchanges will be a major focus of its digital asset regulation in 2022. On January 20th, local time, SEC Chair Gary Gensler stated that he hopes trading platforms will take steps in the coming months to subject themselves to more direct oversight by financial regulators. "Additional scrutiny is critical for cryptocurrency investors to get the kind of protections they get when they trade stocks or other assets."

Bears and Bulls Clash

Jason Deane, an analyst at digital asset research firm Quantum Economics, says that rumors about the Russian mining ban, the impact of the tapering program, and ongoing regulatory concerns in some jurisdictions are currently outweighing the long-term fundamentals of cryptocurrencies in trading and investment decisions. "At the same time, the increasing use and adoption of Bitcoin in economies with high inflation has created a chaotic market situation." Jason Dean expects "volatile and directionless trading" in the short term for cryptocurrencies like Bitcoin, with potential for further softening in the future.

UBS analyst James Malcolm went as far as to say that cryptocurrencies are headed for a winter. According to UBS data, there are currently almost no short-term Bitcoin holders. In James Malcolm's view, investors have gradually realized that, given Bitcoin's volatility and limited supply, it is not actually a better currency. Furthermore, it will face even stricter global regulation in the future. "Stablecoins that have surged in price and decentralized finance projects will surely face government crackdowns in the coming months."

However, some internet giants remain optimistic about Bitcoin. Recently, Sam Bankman-Fried, CEO of cryptocurrency exchange FTX, said in an interview that he believes Bitcoin's price could exceed $100,000, "Of course, Bitcoin's performance could also be far worse than we expect." He also emphasized that, from a consumer perspective, the arrival of a more efficient Bitcoin spot ETF is only a matter of time.

Compared to Sam Bankman's prediction with some reservations, Michael Saylor, founder and CEO of MicroStrategy, the publicly listed company that holds the largest amount of Bitcoin globally, is unwavering in his conviction. He recently reiterated that he would not sell any of his Bitcoin holdings, even in the face of a prolonged bear market. In his view, Bitcoin is the best means of fighting inflation. He expects Bitcoin's price to first reach $600,000 and then eventually $6 million.

Conclusion

In the face of tightening global regulation, the price trajectory of Bitcoin is fraught with uncertainty. Whether bearish or bullish, investors should remain rational, fully understand market risks, and invest cautiously.