Crunch time comes for cryptocurrencies

Cryptocurrencies are marketed as an anti-government and anti-establishment alternative. But can they survive a government and establishment onslaught? Because they’re getting one.

Facebook, Google and potentially Twitter will ban cryptocurrency advertising on their platforms. That includes advertising of related products.

Banks around the world are refusing to deal with major cryptocurrency exchanges. Sometimes when those exchanges are in trouble. Sometimes at the whim of the bankers.

On the government side, the crackdown is a muddle. Governments are all over the place on cryptocurrencies. Some back them, some stay out the way, some want to adopt them, and some are seeking to undermine them. It’s an impressive mess.

Holland has Bitcoin City, better known as Arnhem, where the map of bitcoin-accepting merchants is looking cluttered. Canada went from an anti-crypto stance to turning Vancouver and Toronto into virtual currency hubs.

Venezuela launched its own crypto, while Singapore did a trial, and Russia is still mulling it over.

In Germany and Australia, cryptocurrencies are sliding through an impressive tax loophole. As long as you spend your bitcoin, as opposed to selling it, the gains are tax free!

In South Korea, there’s a battle between the bitcoin enthusiasts and their government. In Japan, two of the biggest bitcoin exchange calamities don’t seem to be slowing down bitcoin’s popularity.

Estonia and Mauritius are trying to get their own government systems to run on blockchain technology, which is how bitcoin functions too.

In Nepal, the police arrested bitcoin traders despite lacking a law about bitcoin…

It’s all total chaos.

The beauty of bitcoin is that it only needs one friendly nation to function fairly well. As long as you can get your money into and out of that jurisdiction, of course.

Alternatively, bitcoin would certainly survive perfectly well if governments around the world tried to ban them. But at a fraction of the price it’s at now. That’s because the convenience of buying in and using the crypto would drop enormously.

Bitcoin’s future in a crackdown

In the end, what you want to know about is the bitcoin price. How does its future look?

Contrary to many people’s claims, bitcoin does have value. Being able to send something around the world quickly, for free and anonymously is useful. Even if bitcoin can’t quite live up to those characteristics, it’s useful to the extent that it does.

Price is different to value. Price, when it comes to bitcoin, is all about how many people are piling into the currency. And how much the big holders of bitcoin are selling too. The so-called bitcoin whales might be behind the recent crashes.

The struggle for cryptocurrency regulators is to find the balance where cryptos are used least.

On the one hand, they can control how many people buy cryptos by regulating exchanges, or banning them. This reduces the amount of ways people can get their hands on bitcoin.

It would also have the effect of meddling with a freely available market price. But people could still buy bitcoin from each other, as they do already in many places.

Put in place too many regulations, and you get the opposite effect to what regulators want. More and more people are driven into the bitcoin world instead of out of it. Venezuela, China and Zimbabwe illustrated this nicely. The governments’ crackdowns only encouraged people to turn to bitcoin because it became useful.

The ideal place for regulators is to make cryptocurrencies very inefficient, try to compromise their anonymity and other benefits, as well as only lightly cracking down on them, so that people don’t use them to subvert government control.

In the midst of all this is the biggest factor of all – tax. The vast amount of crypto wealth could deliver enormous tax revenue that’s currently being underreported. Crack down on cryptocurrencies too hard and you miss out on this tax revenue.

Another surprising issue is the use of electricity by the bitcoin system. The complexity of mining has grown so fast that it now needs vast amounts of power to complete. Governments probably don’t favour this particular use of their resource, which is often subsidised in the states where mining is popular.

For now, the mess of government responses are creating the ideal environment. The variety of homes creates a variety of crypto incubators of different types.

But the key question remains. Can cryptocurrencies withstand a crackdown? And how far down will the price go?

Not created equal

Bitcoin gets all the attention. And its flaws are the focus of government crackdowns.

But hundreds of new coins have improved on bitcoin’s weaknesses. They’re not all created equal. Banning them all, or cracking down on them, will either not work or be misdirected.

For example, some cryptocurrencies are anonymous and some aren’t. Some are asset backed, others aren’t. Some work as currencies, but others are adaptable to all sorts of uses.

Governments face a terribly difficult regulatory situation. How do you crack down on cryptos without hampering the blockchain revolution that’s booming outside the crypto space too? And how do you avoid a blanket ban that undermines the justification for the ban in the first place? You can’t ban cryptocurrencies because of their anonymity or usefulness to criminals if they aren’t all anonymous or useful in crime…

Investors face an immense opportunity here. For example, imagine if bitcoin was banned thanks to its currency status, but Ethereum continued thanks to its far more flexible nature. The investment implications are enormous.

The coming crackdowns by governments are of course predictable. So finding the cryptocurrency that will respond best is an excellent bet.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Investing in Bitcoin

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