Setbacks for Bitcoin & Co.

It took quite some effort for the price of the cryptocurrency Bitcoin to crawl back up through the USD 7,000 mark by the end of August in a market characterised by such factors as global crises and uncertainty. Yet the dinosaur among cryptocurrencies did not manage to stay at such giddy heights for long. While yesterday morning the price was still around USD 7,400, it is now quoting at only about USD 6,400 – having slid more than 13% downwards in the space of only a few hours. The price losses are not restricted to Bitcoin, but have been seen across the entire segment. An index calculated by news agency Bloomberg temporarily even fell by over 20%. The global market capitalisation of all the 2,000-odd cryptocurrencies plummeted accordingly, from USD 240 billion to as low as USD 200 billion.

So what’s behind the latest price movements? Recent reports have led to doubts about the further spread of cryptocurrencies in the future. One renowned US investment bank, for example, has shelved plans to set up a trading department for the segment. Proponents of cryptocurrencies had regarded the project as a key step towards greater acceptance among larger investors, and by extension an inflow of capital into the entire market segment.

This is now the second setback in only a few weeks. In mid-August the US stock market watchdog SEC rejected nine applications for the admission to trading of exchange-traded funds (ETF) based on Bitcoin Futures. ETFs are also considered a potential vehicle for market access for a broader investor base. In the opinion of the SEC, there is no guarantee that fraudulent and manipulative actions can be prevented.

An uncertain future
Measured in terms of market capitalization, Bitcoin & Co. continue to enjoy immense media coverage and attract a lot of interest among market players. This is largely down to the fact that many pundits believe cryptocurrencies may have a glorious future ahead. At present though, there are crucially two fundamental hurdles to be crossed: Firstly, there is not yet a reliable regulatory regime, preferably coordinated worldwide, that offers (institutional or private) investors sufficient protection against market manipulations and fraud. Without such protection it looks like it will be hard to guarantee enduring, broad acceptance in the financial markets.

Secondly, and this could be even more important, there are not enough convincing arguments as to why cryptocurrencies will offer people added value in everyday life. This is especially true for people who live in industrialized countries that have comparatively stable traditional currencies, such as the US dollar, euro or pound sterling, as well as an extensive financial system with trustworthy central banks and commercial banks. The opportunity to conduct financial transactions worldwide in just a few seconds using cryptocurrencies may be a positive achievement, but such processes play only a minor role in the day-to-day payments of the broad majority of the population. By contrast, the Blockchain technology that underpins cryptocurrencies affords immense potential for simplifying and speeding up processes, according to prevailing opinion. To date, cryptocurrencies’ supporters have failed to prove that Bitcoin & Co. offer corresponding manifest advantages in daily payment transactions for private users.

 

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