In this two-article analysis, we’ll look into why Bitcoin is moving higher despite authorities best efforts to ban virtual currencies and ICOs.
In this article, we’ll look at the reasons central banks and governments want Bitcoin banned and how their efforts are having the opposite effect, whereby their efforts are instead legitimizing virtual currencies.
In the second article due out in the next day or so, we’ll analyze the charts and the massive momentum behind Bitcoin and show how the rally may have more legs to it. Please see below to become an “email follower” to have the next article including the charts emailed to you when it’s published.
Any further increases in bullish momentum will bode well for those investing in the Bitcoin Investment Trust (OTCQX:GBTC) or following the ongoing developments if the first Bitcoin ETF through the Winklevoss Bitcoin Trust ETF (COIN).
From Bitcoin’s demise to a “Bitcoin bubble” in two weeks:
With all the doom and gloom from a few weeks back about Bitcoin, with the Chinese government banning ICOs and shutting down bitcoin exchanges and even Jaimie Dimon was in on the act verbally trashing the cryptocurrency, one would have thought Bitcoin and cryptocurrencies were dead. And yet, here we are at $5.000. How can this be?
One of the reasons for Bitcoin’s recent rise is the break of its bearish trend line which I highlighted two weeks ago. I won’t rehash my article, The Two Bullish Signals That’ll Produce Another Move Higher, but I wanted to show how the trend line break in both price and the momentum was a strong signal to the market that showed sellers were getting thin while buyers were getting back in.
Chart and notes from September 29th:
- The first bullish break is the price break of the orange trend line (connecting the lows of the correction). This break is significant since it deflates the bearish momentum that was prevalent in the market. In other words, traders will be less inclined to short BTC while it trades on the bullish side of the orange trend line.
- The second bullish break is the break of the trend line on the RSI momentum indicator. The dark red line connects the highs in RSI’s momentum during Bitcoin’s correction. The fact that RSI is moving higher in tandem with BTC’s price action shows there’s momentum behind the current move.
- The momentum break and the price break together has helped to push Bitcoin to $5,000 in just two weeks. Now we’re hearing rhetoric again of a bubble when just last month, those same people were calling for Bitcoin’s demise. So what happened in two weeks?
What’s going on in the market?
There’s a push and pull going on in the cryptocurrency market. On the one hand, we have naysayers in banking and in governments who fear Bitcoin saying it could be the end of the established central banking system. The SEC came out years ago and issued a warning on virtual currencies. The warning encapsulates the fears surrounding Bitcoin and cryptos.
“We are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes.” – SEC
On the other hand, an increasing number of banks and governments are experimenting by investing in blockchain technology.
- Morgan Stanley issued a research report on the challenges and the possibilities for implementing blockchain technology into the financial system. The report concluded with this statement:
“Blockchain technology most likely won’t disrupt the financial industry as quickly or as completely as some expect.” – Morgan Stanley
There are two chief reasons why Bitcoin is being feared by governments and central banks.
- Bitcoin is a threat to their local currency.
- Bitcoin could be used for money laundering since it bypasses the anti-money laundering regulations that governments and international banks have in place.
The Bitcoin threat to central bank currencies:
- Russian authorities have issued their own warning about the dangers with Bitcoin and money laundering.
“Systems for anonymous payments and cyber currencies that have gained considerable circulation including the most well-known, Bitcoin are money substitutes and cannot be used by individuals or legal entities.” – Reuters
- However, the real reason surfaced in the following statement.
“Russian law stipulates that the ruble is the sole official currency.” – Reuters
- The reasons for the ban of Bitcoin has nothing to do whether it’s viable or an effective means of transferring money. The ban has more to do with fears of money laundering and fears that a cryptocurrency could interfere with central banks being able to control their currency. Central banks weaken or strengthen their exchange rates through the monetary system. Those banks purchase and sell bonds to manipulate their currencies or how much money is circulating within their system. With virtual currencies, money can be transferred out of the established system and bypass the central banks.
- Governments love to have control over their banking systems, currencies, monetary policies, and their exchange rates. In the cases of China and Russia, these governments want to control capital flows out of their country, since those outflows of capital decrease investment in their home country. Also, outflows weaken their exchange rates. A weaker exchange rate devalues the assets that foreign investors have purchased in their country. Earlier this year, China began stepping up those capital controls.
“The state asset regulator said on Wednesday, that the latest move by Beijing is to tighten controls on money moving out of the country and stabilize a faltering yuan.” – CNBC.
- For example, if you’re a U.S. investor you spent $10B on a plant in China and the currency weakens afterward, any profits earned that have to be sent back to the U.S. have a lower value since you’d have to convert from yuan to dollars. If the yuan weakens against the dollar, it takes more yuan to convert to one dollar. In other words, your profits have decreased based solely on the exchange rate back to dollars. From an accounting standpoint, the total value of your assets has to be converted from yuan or rubles, into dollars at fiscal year-end. If the yuan or ruble is weaker, your plant and equipment are worth far less in dollar terms after conversion. Your company has an FX loss and the stock price would take a hit as a result.
- In short, a weaker exchange rate of a local currency reduces the value of your investments overseas.
- The fear of a weakening currency has pushed Russian and Chinese investors into Bitcoin. Those who are invested in China and Russia, upon seeing the local exchange rate weaken, want to get their money out fast before they lose any more on the conversion back to dollars.
- An investor or citizen might fear their local currency may weaken because of an ailing economy, government corruption, economic incompetence, or mismanagement of monetary policy by the central bank. However, those fears have been pushing capital flows into virtual currencies like Ether and Bitcoin, bypassing the controls that the governments have in place to prevent capital outflows.
In short, Bitcoin and virtual currencies are a threat to capital controls and currency exchange rate manipulations by governments like Russia and China.
How Russia is inadvertently helping Bitcoin:
The government’s efforts to crack down on Bitcoin has led to increased calls for regulations to monitor virtual currencies and control them. As a result, the officials are legitimizing virtual currencies in the process instead of thwarting them. Russian officials already have opened the door.
“The central bank has said it will not allow them (virtual currencies) to be classed as a means of payment to rival the ruble, but has considered classing them as “digital assets” or goods that would be subject to correspondent taxes.” – Bloomberg.
Also, President Putin chimed in on virtual currencies saying that Bitcoin should be regulated to combat money laundering and terrorism but it was seen as a positive for virtual currencies by the markets because he ended with this remark:
“There should be no “excessive barriers” to the use of cryptocurrencies.” –Forbes.
Remember how Bitcoin was a challenge to a local currency?
- If central banks can implement Bitcoin and not have it be a challenge to the system, or by calling it a “digital asset,” there’s little reason to ban virtual currencies.
- Also, if there’s a way to prevent money laundering and simultaneously integrate bitcoin into the monetary system, there’s also no reason to fear it. As a result, there would be no reason to ban ICOs, Bitcoin ETFs or listings on options exchanges.
In short, the crackdown on Bitcoin by governments in an effort to control their currencies, capital flows, and stop money laundering may have the opposite effect that officials had intended. The crackdown may lead to new regulations aimed at preventing any circumventing of those controls. In the process, those regulations would allow Bitcoin to trade as a digital asset, thus legitimizing it and bringing virtual currencies into the mainstream financial markets.
Who will win out in the long-term is yet to be determined.
On a personal note:
- In my opinion, we have to look at why the naysayers don’t trust Bitcoin because it’s those reasons that need to be addressed in order for cryptos to gain acceptance, have ETFs approved, and get listed on the options exchanges where investors can hedge them. As stated earlier, those reasons include currency controls and money laundering.
- When I worked in banking on an FX trading desk, we watched 9/11 play out in the markets and on TV. We experienced the markets going crazy during the crisis. Orders were hit on both sides of the market, the bid and the offer side because the dollar had swung to such extremes in both directions as events played out that morning.
- The regulations that followed like the Patriot Act changed the regulatory landscape for banks and money laundering. And yet, we figured out a way to make the financial system work, while thwarting money laundering to terrorists. As a result, I understand the fears surrounding virtual currencies. However, I personally believe that if we can get through a 9/11 event that changed how banks and the financial system operates, we can definitely institute regulations that would prevent money laundering and yet not stifle the growth of virtual currencies.
- Perhaps Bitcoin and other cryptos might not look as they do today, but as more naysayers emerge, and subsequently more regulations to prevent crimes are implemented, the chances increase that Bitcoin and virtual currencies are here to stay.
In my next article, we’ll look at the charts for Bitcoin and the key price levels to keep the rally rolling, so please become an “email alert” follower (see below) so we can email you the article once it’s published. Thank you for reading.
Good luck out there.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.