The cryptocurrency market has been dealt a major blow in Turkey after a second exchange went down on Friday. The closures have left hundreds of thousands of people without access to bitcoin and other assets, which many had bought as a hedge against rampant inflation.
Analysts said the events were a reminder to cryptocurrency investors everywhere to be sure to do business with reputable companies.
Vebitcoin, a Turkish crypto exchange which had around $60 million in daily trading volumes, announced it had stopped all of its activities on Friday. It put a message up on its website blaming financial strains.
The Turkish financial crimes watchdog then blocked all the exchange’s bank accounts in the country later that day, according to the state-run Anadolu news agency.
Vebitcoin’s announcement came days after rival Turkish crypto exchange Thodex stopped operations and its founder fled the country. The exchange had around 390,000 active users, according to reports.
The abrupt closure of the exchange was one catalyst for bitcoin’s dramatic fall below $50,000 from recent highs close to $65,000, analysts said.
“The collapse of two exchanges in Turkey sent a warning to many cryptocurrency traders who have gotten into crypto with unreputable companies,” Edward Moya, senior market analyst at Oanda, said.
Turkey’s cryptocurrency woes have been tied up with government efforts to crack down on the market.
Last week the country’s central bank backed a ban on crypto payments. It said using cryptocurrencies for payments could cause “non-recoverable losses” for the parties involved.
But many Turks have turned to cryptocurrencies as a hedge against inflation, which stood at 16.2% in March.
“People like the idea of cryptocurrencies because they’re unconstrained by the government,” Marshall Gittler, head of investment research at BDSwiss, said. “But that freedom comes with costs – it also means there’s no insurance and limited regulation.”
Philip Gradwell, chief economist at Chainalysis, said: “The troubles at Turkish exchanges illustrate the importance of clear and stable regulation for cryptocurrency.”
He added: “Investors in the USA and Europe are fortunate to have reputable cryptocurrency exchanges that operate within a strong regulatory framework, so the events in Turkey should not reduce their confidence.”
Bitcoin could become what Tesla, Facebook, and Google were for the last decade, according to Brett Messing, partner and chief operating officer at Skybridge Capital.
The investment chief explained that just like three of those tech stocks were some forms of networks, bitcoin too is a monetary network.
“Bitcoin is actually going to be the great tech stock over the next decade, in addition to being digital gold,” Messing said at a virtual roundtable discussion this week.
According to him, there are two potential outcomes for the digital token in the near future: either it could remain a niche asset and trade between $5,000 and $50,000, or it could grow to be a “real asset” that could easily hit as much as $500,000.
But in order for it to get to even a quarter of that level, “it’s going to require institutional capital,” he said. “Retail can’t get it there.”
Bitcoin was last trading at $$32,129 on Friday, almost $10,000 lower than its record high of $41,000 earlier this month.
“It’s now a $600 billion asset class. I think it is arguably beyond the point at which it can be manipulated, and I think as it matures, that will become increasingly the case.”
SkyBridge Capital, run by hedge fund manager Anthony Scaramucci, invested $25 million into a bitcoin-focused fund that went live on January 4. The “SkyBridge Bitcoin Fund” was launched so that the fund got in before bitcoin’s price soars even higher.
The firm’s flagship fund is a $7 billion Registered Investment Advisor (RIA), but for the purpose of managing the bitcoin fund, it isn’t acting as one. “By doing that, we don’t have to satisfy what’s called a custody rule under the Advisers Act,” Messing said, referring to the issue of custody service by hedge funds who hold large amounts of cryptocurrency.
In terms of risks to bitcoin, government regulation is by far the biggest. Just like it is for technology companies.
Messing said: “If you talk to… what is Mark Zuckerberg worried about? What is Jeff Bezos worried about? The thing they worry about the most is the government, and that’s the first concern.”
A breakdown in infrastructure is another point of concern since bitcoin makes big moves everyday on exchanges that could falter.
Lastly, there could be a greater risk that no one is prepared for.
“We’re trying to be crypto-hip, but whoever knew that we’d be sitting here in a pandemic on Zoom?” said Messing. “No one predicted this. I imagine the risk for Bitcoin is one that none of us are going to identify.”
Bitcoin has more than doubled in less than a month, leaving analysts and investors stunned and concerned about a possible market bubble.
In many ways the token’s rally in recent months is crucially different than the surge seen three years ago, as buyers now range from casual day traders to fund managers handling billions of dollars in assets.
Easy monetary conditions and trillions of dollars in fiscal stimulus have led some investors to view the token as a new inflation hedge.
Detailed below are the factors driving bitcoin higher, and why experts don’t think the cryptocurrency will crash as it did in 2017.
It took nearly 11 years for bitcoin to reach $20,000 per coin for the first time in 2017. Just 22 days later, the world’s most popular cryptocurrency has surged another $20,000, and its momentum is so far holding strong.
Bitcoin’s rapid climb back in 2017 was swiftly followed by sell-offs that erased the bulk of its quickly earned gains. But no such trend has emerged this time around, and experts say a combination of factors fueled the token’s surge through 2020 and will continue to boost bitcoin in the new year.
Detailed below are three reasons behind bitcoin’s price spike, and a discussion of why it’s unlikely to suffer a crash similar to that seen two years ago.
(1) Fear of missing out
While passionate retail investors powered bitcoin’s 2017 rally, public companies sparked the token’s latest climb. MicroStrategy started a chain reaction when it bought $425 million worth of bitcoin in August and September, Jimmy Nguyen, president of the Bitcoin Association, told Insider. The move opened the door for other public companies to view bitcoin as a viable reserve asset.
Square followed in October with its own $50 million purchase. Still, it wasn’t until PayPal adopted bitcoin that prices began to rocket higher. The company announced on October 21 that it would allow its hundreds of millions of users to buy, sell, and hold bitcoin. The token leaped to its highest level since July 2019 as investors saw the adoption as a key step forward for bitcoin’s widespread use.
“People are seeing a move to it as a reserve asset, knowing there’s a limited supply of Bitcoin, and saying, ‘okay, I want my piece of it before it goes too high in price,” Nguyen said.
The subsequent rise in bitcoin prices then pulled institutional investors into the fray. Fund managers who previously balked at the token and its violent price swings feared they were missing out on strong returns and began shifting some cash into the cryptocurrency.
Institutional investors have since pushed billions of dollars into the cryptocurrency market. Their involvement has played the biggest part in the token’s meteoric rise through the end of 2020, according to Douglas Borthwick, chief marketing officer at digital-asset trading platform INX.
“If you don’t have something in your portfolio that’s performing well, then you’re not going to perform well. People are going to leave your fund,” Borthwick told Insider. “You’ve got larger and larger position sizes chasing a smaller and smaller number of bitcoin in circulation.”
(2) Demand for inflation hedges
Bitcoin may first seem completely disconnected from the coronavirus pandemic, but the health crisis’ fallout has played a critical role in supporting token prices. Governments around the world passed several trillion dollars worth of fiscal stimulus to pad against the pandemic’s economic damage.
The influx of fresh currency and easy monetary conditions boosted the case for bitcoin as a hedge against inflation, JPMorgan analyst Nikolaos Panigirtzoglou said in November. A limited supply of 21 million tokens and insulation from policy decisions saw the token serve as an alternative to gold and other hedge assets.
“That money printing has meant that everyone in the world has been searching for hard assets to invest in, something that isn’t going up in terms of supply,” Borthwick said.
Companies and institutional investors warming up to bitcoin has given legitimacy to an asset recently known more for its murky uses than its investment potential. During the token’s 2017 rally, those less familiar with cryptocurrencies associated them with “nefarious activities,” Borthwick said.
PayPal’s adoption and the influx of institutional funds lend bitcoin new legitimacy and interest among retail investors, Borthwick added. And just yesterday, the US Office of the Comptroller of the Currency said national banks can use blockchain networks and stablecoins for payments, further legitimizing digital currencies.
“The more big names get involved in the space and the more regulators start writing regulations about it, the more it becomes a mainstream asset,” Borthwick said.
Curiosity among everyday investors exploded through the end of last year. Global search interest for bitcoin more than tripled from early October to early January, according to Google Trends data. Celebrities ranging from actress Maisie Williams to rapper Meek Mill have tweeted about entering the cryptocurrency market. In a matter of months, the crowd pushing cash into bitcoin has evolved from fund managers and crypto-fanatics to practically everybody else, Borthwick said.
“There’s an absolute land rush to get invested in the crypto space,” he added. “It’s no longer friends and family and old friends from college.”
Bitcoin’s rapid doubling has naturally prompted some investors to deem the token a bubble. JPMorgan said Monday that the token’s rally moves it “into more challenging territory,” and that a continued climb at its current pace would likely “prove unsustainable.”
The market very well may be “prone to a sort of correction,” but it’s unlikely to resemble that seen three years ago, Nguyen said. Institutional investors are poised to maintain their bitcoin positions for fear of prematurely selling and missing out on additional returns.
Growing interest in blockchain and cryptocurrencies also protects prices from returning to the recent lows, Borthwick said
“What you’re talking about here is the adoption of something by everybody in the world over a very short period of time,” he said. “When you talk about a new technology, I don’t think there ever is such a thing as a top.”
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