The rout in cryptocurrency prices this month underscores one important thing that perhaps slipped the minds of over-anxious traders during the run up in values before May.
Government looms large as a major headwind to the otherwise unregulated crypto sector.
“Until recently, regulators and authorities have been reluctant to move too fast into the cryptocurrency space because there has been a lot of innovation. This allowed the financial sector to innovate. Competition and innovation are usually positively correlated. But governments are unlikely to relinquish their monetary monopolies,” said Deutsche Bank analyst Marion LaBoure in a new research note.
LaBoure said governments worldwide — notably officials in the U.S. and China — could crack down on crypto as it begins to “seriously” compete with regular currencies.
“In the end, regulating cryptocurrencies is not that difficult. The Bank for International Settlements (BIS), the G7, and the G20 are all keeping a close eye on cryptocurrencies. And regulation is coming. The latter part of 2021 and early 2022 could be a turning point for cryptocurrencies around the world. Regulators have cryptocurrencies on their agenda as a key priority,” explains LaBoure.
Indications of the heavy hand of government coming down on the crypto space are already emerging.
Authorities in China said Friday that it would be necessary to crack down on bitcoin mining and trading behavior to limit investment risks. This comes on the heels of similar comments from authorities in the country to kick off the week.
Meanwhile, Federal Reserve Chairman Jerome Powell said in a presentation on Thursday the governing body would continue its work on a digital dollar. Any digital dollar would likely weigh on the bullish sentiment for bitcoin and other cryptos.
“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said. “Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation.”
Amid the renewed regulatory concerns, crypto prices have crashed from their highs.
Bitcoin prices have tumbled 38% from their record high of nearly $60,000, hit earlier this month. Dogecoin prices have tanked more than 50% over this same span.
“As fashion mogul Karl Lagerfeld pointed out, ‘Trendy is the last stage before tacky.’ And what’s true for glamour and style might also be true for bitcoin. Just as a ‘fashion faux pas’ can happen suddenly, we just received the proof that digital currencies can also quickly become passé,” LaBoure said on the crypto sell-off.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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