Bitcoin price lags while regulators raise fears and banks grapple
Bitcoin and the wider crypto markets face a pullback amid regulatory concerns and normal consolidation.
- The crypto markets are facing a pullback.
- Regulators have raised concerns around Bitcoin.
- Investment banks are still struggling with cryptocurrency valuation.
The lagging performance may be partly just a natural pullback following recent gains. It also may be due to speculators shifting attention to Ethereum, which is currently pushing against its all-time high and looking like the faster horse, and recent disapproving commentary on Bitcoin from Treasury Secretary nominee Janet Yellen and European Central Bank president Christine Lagarde.
Their comments focused on Bitcoin's use in money laundering and other nefarious business, and regulatory changes to close off those avenues.
"[Bitcoin] is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity," Lagarde said last week. "There has to be regulation. This has to be applied and agreed upon ... at a global level because if there is an escape that escape will be used," Lagarde said.
Yellen echoed the sentiment in response to a question at her confirmation hearing this week.
"Cryptocurrencies are a particular concern. I think many are used at least in a transaction sense mainly for illicit financing and I think we really need to examine ways in which we can curtail their use," she said.
According to Chainalysis, criminal activity accounted for only 0.34% of cryptocurrency transaction volume in 2020, while according to the United Nations Office on Drugs and Crime the amount of money laundered globally each year is equivalent to 2-5% of the global GDP – or $800 billion to $2 trillion per year.
While regulatory growing pains may put a damper on today's crypto market, it's also possible that regulatory clarity will go a long way towards helping Bitcoin tap into the vast majority of the world's illicit money market that operates in plain sight under the veneer of legality.
One might argue this is good for Bitcoin.
Weighing on prices
In a report last week, UBS investment bank published its thoughts on some of the questions its clients have about Bitcoin, chief among them "should I buy?"
In contrast to the six figure Bitcoin price predictions issued by JP Morgan, Citi and other banks, UBS struck a conservative tone and advised any buyers to go in with a limited amount, to have an exit plan and to be prepared for it to go to zero.
"Our general guidance is this: While we wouldn’t rule out further price increases, we’re somewhat skeptical of any essential real-world use cases, which makes it hard to estimate a fair value for Bitcoin and other cryptocurrencies," UBS said. "We are also cognizant of the real risk of one losing one’s entire investment. Investors in cryptocurrencies must therefore limit the size of their investments to an amount they can afford to lose. We also suggest thinking about an exit strategy."
It also unironically considered the possibility that a faster and cheaper cryptocurrency could yet usurp Bitcoin's position as the king of crypto on account of having superior transactional properties, and seemed unaware that any cryptocurrency has a function beyond being a collectible asset or a cash equivalent.
"Other decentralized cryptocurrencies [than Bitcoin] are much more stable by design, have lower transaction costs, and hence may be more suitable as cash alternatives. Examples include Bitcoin cash and Litecoin" - UBS investment bank, 14 January 2021
UBS made no mention of DeFi, smart contracts, staking, crypto yields, governance tokens and similar.
As such, despite the limited knowledge shown by the report's authors, the UBS report still presents an interesting window into some of the scepticism and misconceptions around cryptocurrency that may be weighing on prices.
Interestingly, the report also names the lack of cash flows and similar measurables as the main reason it's having such a hard time with Bitcoin.
"The key reason why we find it challenging to come up with a valuation model is simply that Bitcoin and other cryptocurrencies don’t yet have future cash flows that we can discount," UBS says.
"Various models have been proposed to overcome this challenge... What the proposed models have in common is that, in one form or another, they all rely on a narrative around future use cases... we're neither claiming that these narratives are right or wrong; we're simply stating that the view you subscribe to determines the fair value you choose. This makes these frameworks much less credible than those applied to traditional assets."
This suggests cash flow tokens will be able to find a strong following from more traditional investors once they reach adequate size and awareness. All the better if those investors then start asking investment banks about them.
This could bode well for Ethereum, which is currently in the process of moving to proof of stake and cementing cash flows as part of the protocol, as well as all the DeFi tokens whose cash flows are very measurable and growing fast.
Narratives are potentially priceless, but hard to put a price on, while cash flows are a language everyone speaks.
Disclosure: The author owns a range of cryptocurrencies at the time of writing