4 threats hanging over cryptocurrencies

Cryptocurrencies seem to have found the bottom after a stunning correction, as a result of which bitcoin and ether collapsed from record highs in mid-November to January lows. Digital assets are no stranger to explosive and sweeping price movements. In recent years, the “bullish” and “bearish” phases have replaced each other with enviable regularity.

Cryptocurrencies have given a new meaning to the concept of “volatility”. Before the advent of bitcoin, commodities were considered very volatile assets. Cryptocurrencies marked the beginning of a new era.

The casino makes money on the desire of players to hit the jackpot. State lotteries are not far away from them, promoting the slogan “all you need is a dollar and a dream.”

Human nature has also manifested itself in the digital currency market.

Stories about how investments of $ 10 (made in bitcoin in 2010) turned into $ 8 million by 2021 were not the last reason for the appearance of more than 17,400 altcoins.

As cryptocurrencies adjusted from the peaks of mid-November, the interest of speculators gradually weakened. Nevertheless, in mid-February, they returned to the market with a vengeance, attracted by the “bullish” wave of bitcoin, ether and many other cryptocurrencies.

Cryptocurrencies are Back in the Game

On November 10, the “key reversal” figures formed on the charts of bitcoin and ether, followed by a correction that cost the currencies more than half of their value. After reaching the January bottom, BTC and ETH regained some losses, gaining a foothold well above the lows of mid-February.

Bitcoin Futures – Daily Timeframe Bitcoin Futures – Daily Timeframe

Source: CQG

The chart reflects the “bearish” reversal of November 10, which triggered a drop in bitcoin futures from a high of $70,330 to a low of $32,945 by January 24. The 53.2% decline exhausted the downward momentum, and by the time of writing, bitcoin had returned to the $44,000 mark.

Since February 7, Bitcoin futures have been trading between $41,420 and $45,905, forming a series of rising highs. In the short term, the key boundary is the $51,640 mark, which represents the middle of the range passed from November to January.

Futures on ether – daily timeframe Futures on ether – daily timeframe

Source: CQG

February Ethereum futures fell by 56.2% (from November 4,945.75 dollars to January 2,164.50 dollars). Trading near $3,000, it remains below the middle of this range (which passes around $3,555). Since February 7, ether futures have consolidated between $2,831.50 and $3,292.

If history is destined to repeat itself, then bitcoin, ether and many other altcoins are waiting for another rally, during which they will rewrite record highs again.

However, any investor or speculator who wants to start working with cryptocurrencies should be aware of four significant risks.

The first risk: government bans

The geopolitical landscape has become very volatile. The United States and Europe support Ukraine in its confrontation with Russia. Russia’s demands for security guarantees and non-expansion of NATO, backed up by 130,000 troops on the border with Ukraine, were most recently seen as preparations for an invasion.

China and Russia have agreed to expand cooperation, while Beijing supports Russia, not Ukraine. China has promised to help Russia in the event of the introduction of new Western sanctions, greatly reducing the effectiveness of potential measures. Iran and North Korea pose a danger in themselves by building up their nuclear capabilities.

Given the global reach of cryptocurrencies, we have the right to expect new government bans on trading and turnover of digital assets. And although no laws will prevent market participants from working through secure Internet channels, the growth of this segment will slow down significantly.

Second risk: regulation

The SEC, CTFC and US lawmakers have paid attention to cryptocurrencies, and European regulators are trying to keep up with them. And although they explain their activity by “protecting society”, the main goal remains to maintain control over the money supply.

Central banks and governments control the wallets of their citizens because they are able to regulate the amount of money in circulation. The ideology of cryptocurrencies opposes them to instruments of state control, since the value of digital currencies is determined solely by the balance of supply and demand.

Moreover, traditional banks and financial institutions view cryptocurrencies as a threat to their profits. The more people use cryptocurrencies, the less they depend on traditional systems.

Regulation is sure to continue to tighten, which may interfere with “libertarian” money. The front line will be on the issue of control over the money supply, since governments do not want to abandon such effective instruments as monetary and budgetary policy.

Third risk: taxation

Taxation can have a strong impact on cryptocurrencies. The US Tax Administration and similar structures in other countries are already developing policies aimed at combating the growing asset class.

Tax policy can both support markets and restrain them. Politicians, regulators and lobbyists can use taxes as a weapon in the struggle to maintain control over the monetary system.

Fourth risk: incredible volatility

In the world of investors and traders, profits go hand in hand with potential losses. The incredible price jumps of cryptocurrencies have made them a speculator’s dream and a nightmare for investors who chose the wrong moment to buy. Visionary investors were able to ride the rising wave (which, however, is interspersed with temporary corrections). But those who invested in bitcoin, ether or other cryptocurrencies in October or early November recorded horrific losses.

High volatility is a serious risk. I have been trading in various markets for more than four decades, and I have never witnessed such sharp fluctuations as in the digital asset market. And I say this as a person who is familiar with commodities firsthand, whose price movements fade against the background of cryptocurrencies.

Bitcoin, ether and other altcoins seem to have found a local bottom. This means that many investors and speculators will click the “buy” button in anticipation of another explosive rally.

Remember: invest no more than you are willing to lose, as cryptocurrencies are at risk of complete depreciation. As the manager of a large hedge fund Ray Dalio said in 2021, governments are capable of “killing” this asset class. Of course, this has not happened yet, but when it comes to cryptocurrencies, buyers should be clearly aware of all the risks that are inseparable from potential profits.