Bitcoin veterans unshaken by South Korea ban, as analysts battle over theory

In spite of the major plunge in digital currencies this week where the market lost approximately $200bn and with Bitcoin down around 50% since nearing $20,000 in December, these veteran investors known as “hodlers” -- due to a typo -- are used to the irregularities of cryptocurrency prices. On Thursday they saw the price rebound from a low below $9,500 to approach $12,000 again.

The cause of the fall has largely been attribute to the South Korean government's threat to ban cryptocurrency trading in the country, as well as China's move to stop new digital currency offerings.

Other reasons for the wobble that precipitated the crash were cited as the expiries of the first Bitcoin futures contracts on the CBOE on Wednesday and on the CME on 26 January, plus Visa deciding to shut down some cryptocurrency cards, and BitConnect announcing plans to close its lending and exchange platform.

But the 'hodlers' were not overly perturbed by the prospect of Seoul's ban. “In case the government shuts down all local exchanges, investors can always go abroad and open an account there,” said a South Korean student told Reuters.

Cryptocurrency experts have said the ban may put off new market entrants of investing in Bitcoin but for those who are already in the market it would be fairly easy to move digital assets anywhere and hard to impose restrictions that hold without a global agreement.

The experts say that if users hide their IP address from authorities using virtual private networks they could continue their trading as usual, or use one of the decentralised exchanges that do not require identification.

Company officers at Seoul-based exchanges say that the moves of users to exchanges in other country have accelerated.

Analyst Naeem Aslam at Think Markets in London said the Everest-like rise of cryptocurrencies was almost entirely due to the market of speculators who are looking to become wealthy, but he insisted that despite the one-month crash it did not change the argument that current fiat currencies of the world and present regulatory system are "way behind the curve".

Looking at the Bitcoin price from a technical perspective, he said it was "enormously oversold".

"Fear of missing out on the opportunity among investors is kicking in, and this could be the very reason that we are experiencing a dead cat bounce, if not a bottom for the Bitcoin price. The explosive move for the Bitcoin price back in November 24th (which started the stellar rally) could be the core area of support, if not then there is more pain to come.

"If history serves us correctly, bitcoin has the ability to fall as much as 80%, and that means that the price could drop all the way to $3935, from a high of $20k."

CRYPTOCURRENCIES WILL REPLACE FIAT CURRENCIES? RUBBISH!

But according to Capital Economics in London and others, Bitcoin and others do not yet fulfil the traditional function of money and the price has "a lot further to fall yet".

“Most people are buying Bitcoin, not because of a belief in its future as a global currency, but because they expect it to rise in value,” economist Vicky Redwood said. “Accordingly, it has all the hallmarks of a classic speculative bubble, which we expect to burst. Triggers for the bubble to burst could be a further crackdown by regulators or a major hacking attempt."

She added that claims that cryptocurrencies will replace established fiat currencies "are rubbish", with Bitcoin not fulfilling the traditional function of money, with technical problems and high transaction fees making it an impractical means of widespread exchange, though future developments could change this.

"People primarily just want to hold Bitcoin in anticipation of further gains, rather than use it to buy things," she said.

German broker Flossbach von Storch also attacked Bitcoin as solely being a means of speculation, being neither a viable means of payment compared to the volumes processed by credit card companies like Visa or Mastercard, nor a means of preserving wealth.

"This is not just due to extreme price fluctuations, potential security risks and increasing dependence on Chinese computer centres, but also because of the many other competitive cryptocurrencies that put the scarcity of Bitcoin at risk, thereby weakening its main advantage over almost infinitely reproduceable central bank money," the broker said.

"This leaves primarily the motive of speculation, which now dominates the bitcoin world."

Cryptocurrencies, unlike a nation's fiat money, are not simply claims against a counterparty and lack a key characteristic that is absolutely necessary for money to have value over the long term, namely being a commodity that has intrinsic value or can be changed into one that does, Flossbach analysts wrote.

They pointed to the gold standard of the Bretton Woods system pre-1971, where gold acted as an anchor for the value of money. Since then, “in gold we trust” has shifted to “in God we trust” as the value of an unbacked dollar has fallen to less than three per cent of its value in gold at that time.

"High interest paid on account balances reduced the pain. Since interest nowadays is virtually negligible, the value of money is now decreasing at the full rate of inflation. Even the current modest euro inflation rate of 1.5 per cent will reduce the purchasing power of a EUR 1,000 bank deposit to EUR 860 in 10 years," the analysts said.

"This depressing outlook makes it easy to see why investors are searching for alternatives. Although bitcoin and other cryptocurrencies may warm the hearts of speculators hoping to earn a quick profit, they are of limited use as a long-term store of wealth. Investors who avoid equities due to fear of price volatility will have to accept a slow erosion of their savings, or perhaps place their hopes in gold-backed cryptocurrencies."