Bitcoin 20% drop shows investor risk from volatility
Bitcoin price, which set an all-time high of over $5,000 over the weekend, fell 20 percent as investors sold off investments, following China’s new ruling on initial coin offering (ICO).
Analysts told BusinessDay that the crash could be a result of weakening appetite on the part of equity holders of the digital currency.
“If you look at the way the price of bitcoin has grown, particularly this year, it has had the highest growth from the beginning of the year; from $1,000 to $5,000 within nine months,” said Austin Ejola, Deputy Vice President at Planet Capital, “One of the factors responsible for the growth was that China was open to it and also, the likes of Amazon and other big retail shops were gradually being open to it. So if China begins to clamp down on it, then of course the appetite for holding this kind of coin is going to reduce.”
The world’s number one digital currency, bitcoin began Monday morning at $4,037.50, representing about 20 percent drop from its record high of $5,013 on Friday, September 1. As at press time, the Coindesk Bitcoin Price Index showed it has recovered slightly at $4,348.56.
The People’s Bank of China ban is the first comprehensive regulatory block on ICOs – a process where fundraisers distribute digital tokens to investors who make financial contributions in the form of cryptocurrencies such as bitcoin and ether. The Chinese central bank said it has completed investigations into ICOs, and will strictly punish offerings in the future, while penalising legal violations in ones already completed.
The bank ordered companies that have already raised money to provide refunds, but it did not specify the manner in which the funds will be refunded.
So far, a total of $1.6 billion ICOs have been raised across the globe by different companies and China accounts for about a fifth – nearly $500 million, of the funds.
The cryptocurrency market recoiled on news of the ban in China, with investors selling off huge cryptocurrency assets in panic.
“I do not think it is about risk appetite per se,” said Ejola, reacting to reports that bitcoin investors may not have the required risk appetite for such a highly volatile asset.
“What would you do with a bitcoin, if it is not convertible (to example cash). It is not a commodity, and neither is it a currency per se. The truth is that if you have it, it is not backed by any substance. The only reason people are holding bitcoin is because they expect to exchange it for some form of value and as a store of value. If that is beginning to change, then the only alternative is for people to start running out of it,” Ejola said.
Many companies have had to cancel their ICOs, while those that have concluded their offering are seeking to return money to investors. Four ICO start-ups have reportedly commenced the process of returning people’s money. Just hours after the announcement, a firm called, ICOinfo, a platform that hosts a variety of token sales, said four of its hosted ICOs would be shutting down.
“China is home to one of the ingenious fraudsters in the world. So I think the regulatory body wants to take a kind of protective measure for regular investors,” said Yuji Nakamura, a bitcoin analyst on Bloomberg.
There are reports that more regulatory caps lay ahead for operators in the crypto space in China.
Following the Chinese ban, the Bank of Russia also issued a statement warning investors about the risks of digital currencies, including bitcoin as well as ICOs.
The Russian regulator said it was not in a hurry to admit digital currencies, as well as any financial instrument nominated or associated with cryptocurrencies, to be circulated and used in organised trades and in clearing and settlement infrastructure on the country’s territory.
It would be recalled that the Nigerian Central Bank has also been vocal about the risk of investing money in cryptocurrencies. Early this year, the CBN reiterated its position and disclosed that a new committee it set up to understudy cryptocurrencies and blockchain technology will soon be ready with its report.
FRANK ELEANYA & CALEB OJEWALE
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