Was the US$1tr market capitalisation the last act in crypto’s independence?

Bitcoin and several other cryptocurrencies appear to exist beyond the rules and logic of the financial markets. This is fine when the market is small and populated by consenting investors who recognise the opportunities but have a clear understanding of the associated risks. But the cryptocurrency sector’s ascension to a US$1tr market capitalisation and its subsequent plumet, have led to increasing numbers of regulators forcibly stepping in. It could be that the first half of 2021 marked the beginning of the end of the sector’s independence. We now need to make sure that the end of the sector’s regulated phase doesn’t come at the cost of its current advantages, says financial markets veteran Kay Rieck.

Back in the heady days of April, I discussed the Bitcoin rollercoaster and published an article that looked at the highs and lows of bitcoin price over the last five years [HERE]. At the time, the price of a single bitcoin was around US$58,000, more than double the US$24,000 it had enjoyed at the end of December 2020 a mere three months earlier. Three months later and the price has plummeted to around US$36,000.

As I said at the time, we are either witnessing the emergence of a new financial reality or a speculative frenzy and the inflation of a bubble that is only going to end in tears. The dip from US$58,000 to US$36,000 is more than likely to have caused a few tears. At the same time though, at the end of June 2020, just twelve short months ago, the cost of a single bitcoin was around US$12,000. If you got on the rollercoaster then, you have tripled your money, and you’d still be smiling.

The big drop

The point I made in the article was that it is easy to get caught up in the thrill-a-minute action of bitcoin, but the more important thing that is happening is the rapid evolution of the financial system. Crypto has the potential to massively reduce barriers to entry for many asset classes and can help investors spread their risk far more efficiently than tends to be currently the case. It can also help small businesses attract finance at a competitive price, which is something that the financial markets have been trying to achieve since time immemorial. There are also projects that are making inroads into supporting illiquid real-world assets that will benefit from being able to be traded quickly, transparently and cheaply while simultaneously protecting value.

If crypto wants to move beyond its current audience and achieve its potential, it needs to find a way to move away from what could be called its anarchist roots and find a way to accommodate the expectations of regulators around the world.

The US$1 trillion market capitalisation coupled with the subsequent plunge of bitcoin and several other cryptocurrencies, appears to have had a galvanizing effect on regulators and other interested parties in the financial services.

Many of the people who have lost money in the crypto sector over the last year went in with their eyes open and understood their risk. Others may not have lost money at all. There are plenty who have, however, whether it has happened through the market moving against them, unwise investments in less credible projects or by being sucked into dubious schemes. They simply saw what they thought was an opportunity and perhaps didn’t do enough research and lost out as a consequence.

In some ways this is life and the financial markets, but the regulators don’t tend to see it that way and there are several, not least China and the United Kingdom, that have moved beyond making noises and are now very visibly cracking down on the crypto sector.

Some of this may be political timing and some may be the result of governments starting to re-focus on wider aspects of the financial markets after their treasuries have spent the last eighteen months dealing with the implications of the pandemic. No matter what the reason, it is happening whether you like it or not.

There is a risk, though. The crypto sector represents some very real opportunities to enhance the way that business is done, and these opportunities may be sacrificed or at the very least watered-down if governments don’t tread carefully or if crypto specialists react defensively. This would be a massive shame. The bitcoin rollercoaster is perhaps a sideshow that we can all do without, but crypto overall still has the potential to be a significant force for good.

About the author

Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets, building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.