The price of bitcoin was sent plummeting 18% as it and other cryptocurrencies yo-yo in value over fears of a wider trading crackdown spurred by renewed potential of South Korean regulatory action.
Bitcoin’s slide of over over $2,200 triggered a massive selloff across the broader cryptocurrency market, with biggest rival Ethereum down 23% on the day, according to trade website Coinmarketcap, and the next biggest, Ripple, plunging 33%.
Following initial statements that South Korea was looking to ban trading of cryptocurrencies, followed by a climbdown, the country’s finance minister Kim Dong-yeon said in an interview with local radio station TBS that banning trading in digital currencies was “a live option”.
Kim said: “There are no disagreements over regulating speculation,” such as using real-name accounts and levying taxes on cryptocurrency trading. Shutting down digital currency exchanges is “a live option but government ministries need to very seriously review it,” he added.
Bitcoin is a 'cryptocurrency' – a decentralised tradeable digital asset. Invented in 2008, you store your bitcoins in a digital wallet, and transactions are stored in a public ledger known as the bitcoin blockchain, which prevents the digital currency being double-spent.
Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. The lack of any central authority oversight is one of the attractions.
This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.
The exchange rate has been volatile, with some deeming it a risky investment. In January 2021 the UK's Financial Conduct Authority warned consumers they should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin.
In practice it has been far more important for the dark economy than it has for most legitimate uses. In November 2021 it hit a record high of more than $68,000, as a growing number of investors backed it as an alternative to other assets during the Covid crisis.
Bitcoin has been criticised for the vast energy reserves and associated carbon footprint of the system. New bitcoins are created by “mining” coins, which is done by using computers to carry out complex calculations. The more bitcoins that have been "mined", the longer it takes to mine new coin, and the more electricity is used in the process.
Following the latest news, Bitcoin traded as low as $11,191.59 on the Luxembourg-based Bitstamp exchange, down 18% on the day for a short period, putting the digital currency on track for its biggest one-day fall in three years.
“It’s mainly been regulatory issues which are haunting the cryptocurrency, with news around South Korea’s further crackdown on trading the driver today,” said Think Markets chief strategist Naeem Aslam, who holds what he described as “substantial” amounts of bitcoin, Ethereum and Ripple. “But we maintain our stance. We do not think that the complete banning of cryptocurrencies is possible.”
Joachim Wuermeling, a director of Germany’s national bank, said on Monday that national rules are likely to prove ineffective given the borderless bitcoin’s global scale. He said: “Effective regulation of virtual currencies would therefore only be achievable through the greatest possible international cooperation, because the regulatory power of nation states is obviously limited.”
European Union states and legislators agreed last month on stricter rules to prevent money laundering and terrorism financing on exchange platforms for bitcoin and other virtual currencies.
Meanwhile, Chinese regulators have banned initial coin offerings (ICOs), shut down local cryptocurrency trading exchanges and limited bitcoin mining. Chinese authorities also plan to block domestic access to Chinese and offshore cryptocurrency platforms that allow centralised trading, Bloomberg reported on Monday.
Cryptocurrencies enjoyed a bumper year, with bitcoin hitting a high of about $20,000 in 2017 as mainstream investors entered the market and an explosion in ICOs drove demand for bitcoin and Ethereum.
The latest tumble left bitcoin down more than 40% from the record high in mid-December, wiping about $130bn billion off its “market cap” – the unit price multiplied by the total number of bitcoins that have been released into the market.
“[It] seems like it’s uncertainty spooking the markets … with regulations unclear,” said Charles Hayter, founder of data analysis website Cryptocompare. “[Traders] are taking profits on the increased risk scenarios going forward.”
The price of bitcoin was fluctuating to under $12,000 by publication time, according to Bitstamp.
2017’s 1,500% rise in the value of bitcoin has made billionaires out of early investors such as the Winklevoss twins, and seen some such as the Pineapple Fund turn to philanthropic endeavours.
But high-profile investor Warren Buffett recently said he would never invest in bitcoin or other cryptocurrencies, predicting that the assets are in for a fall.
Many do not share Buffett’s scepticism. Companies such as Kodak have been rocketing in value by launching new cryptocurrencies, and some simply by putting the word blockchain in their name.
