Bitcoin faces regulatory scrutiny after record rally

It's been a tough year by all accounts. But for Bitcoin, 2020 has been a marvellous time.

The cryptocurrency almost quadrupled, surpassing US$20,000 for the first time as it notched record after record.

The largest cryptocurrency reached an all-time high of US$28,365 on Sunday before paring some of the advance. The run of outsize returns over October, November and December so far is the longest such stretch since mid-2019. The diehards cheered it as an inflation hedge in an era of unprecedented central bank largesse. Wall Street veterans from Paul Tudor Jones to Stanley Druckenmiller blessed it as an alternative asset, adding to the rally. And firms like Micro-Strategy Inc. and Square Inc. moved cash reserves into crypto in search of better returns than near-zero interest rates deliver.

While none of those reasons for buying Bitcoin comport with its origins as an alternative to fiat currencies, they do point to a growing acceptance of crypto as an asset class of its own. “What's happening now — and it's happening faster than anyone could ever imagine — is that Bitcoin is moving from a fringe esoteric asset to the mainstream,” said Matt Hougan of Bitwise Asset Management. “If it's going mainstream, there is just so much money on the sidelines that is going to have to come in and establish a position that it leaves me very bullish for 2021.”

But with Bitcoin capturing greater attention, it could also garner further scrutiny from regulators, says Guy Hirsch at online-trading platform eToro. “Despite this meteoric rise, there are some storm clouds on the horizon,” he said, including the fallout from several last-minute actions by the outgoing Trump administration, among others.

Devotees say that in some ways, the pandemic-ravaged year proved the perfect environment for the digital coin. Warnings of rampant money-printing by global central banks — some of which started to reveal their own interests in digital assets — sparked fears of eventual inflation, while interest rates dipped to rock-bottom lows. That's thrust some investors to chase returns and hedge with cryptocurrencies, pushing its price past US$28,000 from around US$7,200 at the start of January.

Predicting where it will go is a fraught exercise. Many left the coin for dead after its 2017 rally resulted in a crash the following year, a stretch of time sometimes referred to as the “crypto winter.” But it's surged more than 300 per cent in 2020 and many investors say it could continue to gain next year. A Deutsche Bank survey found a majority see it ending 2021 higher, with 41 per cent of participants projecting a target between US$20,000-US$49,999 and 12 per cent seeing it crossing above US$100,000, according to the bank's Jim Reid.

What else is on the radar? To Meltem Demirors at CoinShares, there are some concerns about what the incoming Joe Biden administration might mean for the crypto space. “Generally, I think we have had challenges with the Dems — they prefer more regulation, more oversight,” Demirors said. “I am a bit worried about the direction things are trending,” especially around antitrust lawsuits and an erosion in internet privacy.

A lot will, of course, depend on who fills key positions within the administration. Janet Yellen, nominated to serve as Treasury secretary, has in recent years cautioned investors over Bitcoin, saying it was a “highly speculative asset” and “not a stable store of value.”

Meanwhile, Bloomberg News reported Gary Gensler could be nominated to replace Jay Clayton at the U.S. SEC. Clayton's exit from the regulator is welcome news for crypto fans who saw him take a hard line over the years.

Gensler, who served as a Commodity Futures Trading Commission chair during the Obama administration, is a senior adviser to the MIT Media Lab Digital Currency Initiative and teaches about blockchain technology and digital currencies.