Since the beginning of 2018, the cryptocurrency market has seen a ‘bloodbath’ that saw approximately $500bn shaved off before stabilising now at the $400bn range. Over the past few months, the prices of cryptocurrencies seem to be heavily influenced by public statements made by government officials.
There have been waves of fear, uncertainty and doubt (FUD) surrounding the crypto market from social media outlets, mainstream media and government hostilities. This article will explore some recent government-related announcements to see how much of the news can be taken at face value.
“There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges.”
South Korea is one of the world’s largest markets for digital assets, where demand for Bitcoin was so high that at one point in January the price discrepancy between Korean exchanges was 50 percent higher than those in the United States. Police and tax authorities also raided two of South Korea’s biggest exchanges, Coinone and Bithumb. At the time of the announcement, the local price of Bitcoin plunged as much as 21 percent in midday trade to 18.3m Won ($17,064) after the minister’s comments.
This is similar to back in September 2017 when the Chinese government announced its crackdown on ICOs and the shutdown of its exchanges, including BTCC. At the time of the announcement, China was the biggest player, capturing over 80 percent of the global Bitcoin trade volume.
Since the announcement on September 19th, the price of Bitcoin has gone up by 229 percent to date of the South Korea government announcement. At one point, the price of Bitcoin peaked close to $19,570 from $4,073 back in September, representing a growth of 380 percent. If past is an indicator of future, then even in the worst-case scenario of a complete ban, both projects and investors may find other methods to be involved, similar to how Binance moved its operations from China to Japan.
The market seems to have over-panicked over the announcement made by the justice minister. First, the South Korean government has been trying to find ways to regulate cryptocurrency trading in domestic exchanges since late 2017, as there have been large price discrepancies between Korean exchanges and the rest of the world. As a result, the government is trying to regulate to protect domestic investors from the influx of foreign investors who try to exploit this arbitrage. For example, around early January, Bithumb at one point dominated Ripple’s (XRP) volume with an astonishing 34.35 percent at a price of $3.83 while across non-Korean exchanges the average price remained at $2.50.
A Bithumb representative also commented that regulations could add legitimacy to the market:
“A right set of regulations will rather nurture the (virtual currency) market, and we would welcome that.”
Second, according to a recent survey provided by Quartz, approximately 30 percent of South Korean salaried employees invested in cryptocurrency with an average investment of $5,260. Cryptocurrency investing is especially popular among the young population as the youth unemployment rate in South Korea is at an all-time high, with 12.5 percent as of February in comparison to the overall unemployment rate of 4.2 percent. It, therefore, does not come as a surprise that a petition with over 200,000 signatures was collected which forced the government to review the petition. The South Korea Finance Minister, Kim Dong-yeon, has reaffirmed that the government will not ban cryptocurrency and only regulate exchanges:
“There is no intention to ban or suppress cryptocurrency (market).”
In early February a similar event occurred in India when the finance minister, Arun Jaitley, noted fresh regulatory comments on cryptocurrency during his most recent budget speech. Jaitley said:
“The government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.”
Similar to South Korea, India is home to a large number of Bitcoin traders and investors, as about 10 percent of the world’s Bitcoin transactions come from India. Bitcoin’s price saw a 6.5 percent drop following the announcement, with both mainstream media and social media outlets quick to break the announcement in a manner which presumes the ban on cryptocurrencies in India is imminent.
However, the announcements date back to last year. In November 2017, the executive director of the Reserve Bank of India, S. Ganesh Kumar, commented:
“Our current position on Bitcoins is that we will not be using it for any payments and settlements…though the technology underlying crypto-currencies will not end.”
The previous announcements show that the there has not been a change in government initiatives since the budget speech and this should not have come as a surprise to anybody. However, India could benefit from using cryptocurrency as a store of value. This is because the government is known to pull banknotes from circulation, dating back to January 1946 when Rs1,000, Rs5,000, and Rs10,000 were removed. These notes have since been re-introduced and re-banned over the course of the years. Most recently, on November 8, 2016, Prime Minister Narendra Modi banned Rs500 and Rs1000 notes to fight corruption and terrorism. However, because the announcement came unscheduled, the country faced a severe cash shortage. This especially hurt the lower-class families in India as many do not have proper IDs to exchange the notes that they have or even the time to stand in line in front of a bank for hours. The abrupt move stunned the South Asian nation, with over 23bn notes, 80% of the country’s cash, now suddenly rendered “worthless pieces of paper.”
In analysing the two government-related events, understanding both the government’s past standpoints on the subject and the country’s demographic involvement are two major indicators to consider in one’s due diligence, should other countries in the future follow a similar pattern in expressing concerns over the future of cryptocurrency. With the market in such a volatile and speculative state, conducting in-depth due diligence is essential as information can easily be misinterpreted and FUD may be spread for price manipulation as it seems that for every FUD story, one can find another story to completely contradict it.
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