CBN mulls regulatory framework for cryptocurrencies


It’s been rough new year for cryptocurrency investors in Nigeria and across the globe. The past few weeks have seen billions of dollars wiped off the market, as the plummeting that began late last year got even worse in the new year. Flagship crypto, Bitcoin has lost over 50 percent, from over $68, 000 to less than $33,000 at some point, and now trades at between $36,000 and $37,000. Etherum has gone from the highs of $4,000 to the lows of $2,000, currently stuck around $2,500. Binance coin presently hovers around $370 from over $600.

Smaller altcoins like Trust Wallet Token, Alice, among others, have fared worse. But if there is anything crypto investors have become accustomed to, it is the high volatility of the market, which is both strength and a weakness. The idea always being to buy at dip and sell on high. Yet, as many have come to learn in recent months, dip can get way dipper.

Regardless, the current dip isn’t all unusual given that it’s been the nature of crypto-currencies; what observers say makes it extremely difficult to use as a day-to-day currency. This is the eighth time since its launch in 2009 that Bitcoin has fallen by more than 50 percent in price. The last time it saw such a big dip was in July last year when it shortly fell below $30,000, before rallying by 10 percent a week after.

The current dip started in late November, after hitting highs the same month. Cryptocurrencies prices have been falling since, and investors have been on a selling spree that is causing prices to plummet even further. The Wall Street Journal reported last week that retail investors in particular seem to be driving the drop in cryptocurrency prices, as the volume of smaller transfers declined by more than 40 percent between the first and fourth quarters of last year.

Bitcoin price chart
Bitcoin price chart on Binance. Monday, January 31, 2022. 9:56am

MarketWatch also noted in a report, that new and short-term holders, some of whom just bought at the peak, are mainly responsible for the sell-off. Since November highs, over $1.4 trillion has been wiped from the aggregate crypto market’s value. Highs have turned into deep sighs.

The slow decline that had continued since November last year, accelerated on Friday fortnight ago, with Bitcoin price dropping below $40,000 to a low of $35k, before plunging further to $33,000 by Monday last week, down more than 50 percent from the all time high of over $68,000 reached on November 10. The drop represented worst weekly performance in eight months, bringing back memories of May when China’s crack down on mining and Elon Musk intervention combined to bring down prices.

“Once the market breaks a major support, panic will set in and people will start selling off. That’s what is driving the market down. The major support for Bitcoin was $40,000. Once it broke that support, I knew that a free fall would follow. That’s what happened. Not long after, it plunged to around $33,000 and has been struggling since then,” explained Adolphus Omeh, a crypto analyst and investor who runs a crypto academy in Lagos, but wouldn’t want it named for security reasons.

The recent crash have been blamed on two major factors: first, the Russian central bank’s last week’s calling for a ban on the use and “mining” of crypto-currencies in the country. Russia’s central bank had proposed the banning of cryptocurrency mining on Russian soil, arguing that mining cryptocurrency (a complex algorithm-crunching process that involves huge computing power) threatened the financial stability of Russia. The central bank also accused some crypto-currencies as resembling pyramid schemes. This was a big deal, as Russia is a major hub for crypto mining, particularly since China’s ban on the activity last year.

The proposal, late last week by the country’s political leaders that crypto should be regulated instead, helped to restore a bit of confidence that saw Bitcoin climb up to $38,000, but eventually plunged back to the $36,000 territory on Sunday.

Second, with U.S. Federal Reserve tightening its policy in the face of inflation, many investors are dumping risky assets including crypto, and particularly Bitcoin, the flagship cryptocurrency. Indeed, moves by the Fed to raise interest rates and end its stimulus programme earlier than it had originally planned, had sent the U.S., European and Asian stock markets trending downward since the beginning of the year.

The Fed had sparked a broad sell-off this January by cautioning it will move more quickly than previously expected to reverse policy meant to bolster the economy during the pandemic in an effort to combat rising inflation. Stimulus money going into people’s pockets had also helped to fuel the crypto-currency boom seen over the course of the pandemic. A worse-than-expected start to earnings season has since intensified the drawback, with Netflix crashing 22% last week Friday after reporting a slowdown in subscription growth.

While Fed officials said in December that they project only three interest rate hikes this year, Goldman Sachs chief economist Jan Hatzius noted on Monday fortnight ago, that he expects the central bank will actually hike interest rates four times within the year, beginning from March, prompting a sense of urgency. In uncertain times, investors tend to sell their riskier assets, cryptocurrency being one of them. More traditional investors have gotten involved in crypto-currency in more recent years, establishing a link between the stock and Bitcoin markets.

The effect of Fed’s decision on both stock and crypto was further highlighted last week Wednesday the Fed renewed its warning that a raise of interest rate was imminent. The Fed’s policymaking group had said a quarter-percentage point increase to its benchmark short-term borrowing rate was likely forthcoming, which would be the first increase since December 2018. The statement came in response to inflation running at its hottest level in nearly 40.

Following the remark by Fed Chairman Jerome Powell, to this effect, U.S. stocks which had initially rallied Wednesday changed overnight as stock futures fell Thursday morning, indicating a sharply lower open on Wall Street.

Asia-Pacific markets also fell across the board on Thursday overnight. Japan’s Nikkei 225 fell 3.3% while the Topix was down 2.3%. Over in South Korea, the benchmark Kospi dropped 3.13% and in Hong Kong, the Hang Seng index and the Hang Seng Tech index dropped 2.56% and 4.61%, respectively. Chinese mainland shares also declined.

Europe’s Stoxx 600, which includes companies from 17 countries, dropped 0.2% in early trading. Most major European indexes lost ground, but the United Kingdom’s FTSE 100 remained resolute, rising 0.4%.

The announcement had immediate impact on Bitcoin which had begun to rally back up from Tuesday, and had reached as high as $39,000 on Wednesday. But the announcement triggered another wave of sell off that saw the flagship crypto retreat, losing more than $3.500 to below $36,000.

“Once Bitcoin got below $40 you saw the amount of pressure that got it down to almost $30,000. In fact we were projecting that he could go back to 8-month low of $29, 000. But it bounced back and remained at $33,000. It tried to recover last week, rallying up again to nearly $40,000 but again the Fed announcement once again forced sell offs,” explained Adolphus.

“You know the U.S. is a world power, so many people are trying to take cover and make sure that if they increase their interest rate they are not exposed. In fact the crash started with the stock market. We were hoping that it may not affect crypto, but in the end everything was affected.”

But some have pointed out that the recent market turmoil is part of a crypto market cycle, which sees it dip over a long period before staging another sustained rally.

“Yes, the current slide is as a result of U.S. Fed interest rates hike fears, coupled with Russia crack down, but apart from the stock market, Bitcoin has its own cycle,” said seasoned investor and banker, Ken Otti.

“Crypto won’t wake up very soon if you see it at $41,000 sell and buy back. It will likely get to 41 this weekend and get eject there. Currently, from the flow, we are trapped in-between $33,000 and $41,000. It will likely remain in that range for a long time. So, if you want to be buying and selling, sell at $41,000.

“The trend shows that we are in bear, but there is an incomplete rally. There is a pending rally that needs to take Bitcoin to the region of $60, 000 or even break the all-time high. But that rally didn’t happen. However, if eventually we have entered the bear season, then Bitcoin will be waking up after 2024.

“It’s a four year cycle asset. After the pump of 2013, which started from 2012, the next pump was 2017 which started in 2016 and rallied in 2017. This was followed by another one which started in 2020 and rallied through 2021. So, the next one should start by 2024 and rally through 2025.

That is the flow. So, if eventually we have slid into bear, just forget everything you bought and start keeping money. After about eight months from now, you will start buying because the prices would have fallen further.”

What’s next for Crypto?

Recent sell offs suggest that panic is presently ruling the crypto market. Adolphus projects two scenarios: Unless it goes above $40,000 we cannot say that he has begun to recover,” he said.

“And if it doesn’t break above $40,000 this weekend, then it is very likely that we might be heading back towards $30,000 or below. But in the long term, optimism, especially among seasoned investors hardly ever wanes.

Nayib Bukele, president of El Salvador who made the country the first in the world to adopt Bitcoin as legal tender, announced on Friday, fortnight ago, that his government had bought another 410 Bitcoin since prices are low, and many old time investors say it’s the sound strategy.

“Now is a very good time for anybody to buy,” said Adolphus. “If you have money start to buy, especially alternative coins that have good prospects. The market will rally, that’s almost certain. So, it’s always advisable to buy when prices are down.”

It’s a view shared by Mr. Otti who suggested it is better to stick it out. “But be it as it may, there is no cause for alarm,” he said. “Any money that one invested, would always surpass its value, provided you have patience.”

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