The recent market rally has investors hopeful that the end of the Bear market is near. Investment is growing and implementation continues, nevertheless, prices are not reflective of the positive sentiment throughout the industry. Major financial and political figures are speaking out in favor of Bitcoin, praising its potential as a future global currency, but it all seems to no avail. There seems to be a persistent inability for the market to break out past the $6,800 resistance line. And the reason is as painful as it is obvious: no amount of good will can change the fact that uncertainty is holding everything back. There are number factors impeding the resurgence of the market which need to be redressed as soon as possible. In addition to the scalability and price manipulation problems, leverage, regulation, and hacking are also holding the market in place.
Caitlin Long, a veteran Wall Street CEO, is very outspoken about the wrinkles in the “financialization” plans of Bitcoin; in particular in regards to the possibility of “hidden leverage” or fractional reserve trading. In numerous public statements she warns of the dangers associated with applying Wall Street’s perverse trading practices. Practices like Hypothecation, Commingling, leverage, and margin trading. These methods allow for paper claims to be made against the same asset by multiple parties.
Bitcoin will be especially susceptible due to its limited supply. In order to stretch profits the supply will be likely divided and sold in fractions of fractions. Everyone is well aware that this is likely to happen and the consequences it will bring. Therefore, the euphoria created by hedge fund investments is dampened by the risk posed by fractional trading . Retirement pensions, investments, and savings are all at risk if they are thrown into a space with little or too much regulation.
Another worry in investor’s minds is regulation; the lack of and the opposite – too much enforcement, and overreach. This week, the FBI seized the 1Broker exchange for allegedly operating as an unregistered security dealer. This is part of an ongoing and recently intensified crackdown of fraudulent ICOs and securities trading by the SEC. Earlier this year, the SEC filed charges against John E. Montroll, the founder of defunct exchange BitFunder for operating as an unregistered security exchange.
The list of subpoenas, charges, and fines against suspected securities law violators is long and continual. And though this clampdown helps clears the space of fraud and malicious players, it creates additional challenges for upcoming exchanges to become compliant or risk being shut down. This is problematic because the SEC has yet to give specific clarification on crypto security guidelines. And the fact that the US government can arbitrarily shut down any exchange anywhere in the world is at the very least unsettling to all involved in the crypto market. New money in the form of new investors (some of them risk-driven) will be far more apprehensive to invest in an under or overregulated market.
And as if scalability, price manipulation, and the problems mentioned above weren’t enough to stop the growth of Bitcoin, there is hacking. On September 14th, the Japanese crypto exchange Zaif suffered a hack which resulted in the loss of $59.67 million. A month before that, Chinese authorities arrested three men in relation to the theft of $87 million worth of Bitcoin and Ethereum through hacking. This list of hacks, arrests, and losses is also long and recurring; and worse than the loss of money is the loss of faith in public perception towards Bitcoin. Even the infamous 51% attack, advertised as impossible, became a reality this year thanks to cloud computing and cloud mining. This is a major issue holding back trading volume and though super-secure vaults are in development for the custody of Bitcoin ETFs, it will take time for the infrastructure to take shape.
It is not a secret that big institutions are pouring money over crypto and that the market is primed for expansion. Citibank, Bank of America, Fidelity, TD Ameritrade, and others announced their intent to form custody exchanges in the near future. But despite the positive outlook for Bitcoin, serious doubts remain and rapid growth is arguable. There are too many unanswered questions regarding how funds will be managed and held accountable.
Many hedge funds have quietly been loading up on crypto even though not a single project has delivered a working product. For the most part, innovative ideas are yet to leave the drawing board. And the entire ecosystem remains vulnerable to attack and manipulation. While all these issues remain, there is little chance of upward movement; instead, a reversal is not unlikely if things continue as they are. Evidence of this is Mike Novogratz’s statement two days ago that “I don’t think [Bitcoin] breaks $9,000 this year.” This exemplifies the general sentiment of most investors towards the market. They remain bullish but full of reservations.