Written by: Yves, Head of Trading at Wirex
Cryptocurrency markets were shaken this week by a series of negative comments and rumours, but also by the extreme rise in the past 4 days of net outflows from miners wallets, indicating an increased supply pressure around the $35,000 to $36,000 BTC/USD levels. Miners might have finally settled on a range to sell the excess inventory that they accumulated during last year’s rainy season. Although the net exchange flows do not really confirm it, the miners’ financial statements will eventually show whether this inventory has indeed been sold.
In the meantime, the steep positive momentum was definitely broken yesterday after Janet Yellen, nominated by President Joe Biden to be the US treasury secretary, developed her position on cryptocurrencies during the Senate hearing two days ago. The cryptocurrency item was addressed when she was asked about “treasury programs to combat the financing of terrorists and criminal organisations”. Her answer:
“Cryptocurrencies are a particular concern. I think many are used, at least in a transaction sense, mainly for illicit financing and I think we really need to examine ways in which we can curtail their use…”
Given the size in the trillions of criminal activities in the traditional economy, involving nothing else than traditional cash (FIAT), it is difficult to understand why cryptocurrencies would be à main concern in this area. Chainanalysis estimated that the “total cryptocurrency value sent and received by criminal entities” in 2020 is close to $10bio. It is half the amount recorded in 2019 and it only represents 0.34% of all cryptocurrency activity. As Bitcoin mainstream adoption is increasing, the share of criminal transactions is naturally decreasing. Still both its share in percentage of all transactions and its absolute value (in $) are nowhere near the amounts considered as illegal activity in the traditional economy. Furthermore, the rise of Blockchain Analytics solutions to strengthen anti-money laundering (AML), such as Elliptic, is a clear deterrent for criminals. After all, it is easier to track transactions on the Bitcoin blockchain than to track peer-to-peer physical cash transactions. As soon as the identity of an address owner is known, it is theoretically possible to retrieve all historical transactions in connection with this address. The blockchain ledger cannot be manipulated or changed. It is immutable. As a result, analysts can retrieve a trustworthy forensic trail. Any movement in and out of suspicious addresses is public and watched. There is no such thing as banking secrecy. Regardless, there are still a few challenges:
The first challenge for legal enforcement is to assign an identity to a suspicious address. In that respect, the slightest web connection to such an address can give authorities a serious lead: the Bitcoin address can be mapped to an IP address. Nonetheless, mixing or coinjoin techniques can break a blockchain trail and therefore represent a new (but surmountable!) challenge.
The second and more serious challenge is to determine the relevant jurisdiction to enact legislation, but we can argue that this is a global issue that is not really specific to the Bitcoin blockchain. This issue covers in particular all illegal activities in and out of offshore unregulated accounts.
Overall, like any other currency, Bitcoin can be used for illicit activities. But unlike any other currency, the barrier to entry for criminals is much higher, and the public nature of the blockchain is still an effective deterrent. However, some other cryptocurrencies are structurally more confidential (e.g. Zcoin), and are more likely to concentrate illicit activities… Nevertheless, the most popular cryptocurrencies were dumped following Janet Yellen comments. Since the close of Wednesday:
- the Bitcoin price (BTC/USD) lost nearly 12%.
- the Ether (ETH/USD) lost nearly 14%
- the Litecoin (LTC/USD) lost nearly 7%
Since her first comments, Janet Yellen did eventually compromise stating in the written statement that “it is important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system.”
The Biden Administration’s policy over cryptocurrencies is still uncertain. The President did freeze all Federal Regulatory proposals put forward by the previous administration, including the very restrictive obligation for institutions to perform Know-Your-Customer (KYC) on any recipient wallet address, including self-hosted offline wallets.
The market correction was also attributed to a tweet by Bitmex research at 11.30 AM on Wednesday: “There was a stale Bitcoin block today, at height 666,833. SlushPool has beaten F2Pool in a race. It appears as if a small double spend of around 0.00062063 BTC ($21) was detected”. The Bitcoin blockchain is designed essentially to prevent the “double spending” issue, meaning the ability to spend twice the same token. Therefore, Bitmex’ tweet was incorrectly perceived by investors as a breach in the integrity of the Bitcoin blockchain. In fact, the same transaction was indeed added to two similar blocks produced by two different miners (SlushPool and F2Pool), hence creating two histories of the Bitcoin Ledger. But only one block (one history) was eventually validated by the miners. The other history becomes irrelevant… The tweet potentially amplified the correction driving Bitcoin to a low $28,000, the lowest level since January 4th.
The Bitcoin 24h volatility index computed by Bitmex is now in its upper range (close to 10).
We have entered a volatile regime where investors are undecided and surprised over the inconsistencies and rumours that can so easily shake the main cryptocurrency. The price discovery process is a painful one, but it is unavoidable for this singular young currency. Market participants will have to anchor their beliefs on the Bitcoin fundamentals, the proven solidity and simplicity of its inherent structure, rather than market considerations, such as the state of its wild derivatives market. Bitcoin’s safe integrity is the true contract of confidence among its counter-parties.