Why bitcoin could bounce back soon

Bitcoin has briefly fallen below $6,000 for the first time since November last year as the crypto market sell-off continues unabated. There's unlikely to be any rest until the cryptocurrency perhaps drops as low as $5,000, which would take the market back to October prices. Bitcoin is currently trading at $6,905, according to the Coindesk bitcoin price index.

Charles Hayter, founder and chief executive of industry research website cryptocompare.com, was sanguine about the latest developments in comments made in an interview with interactive investor. "Bitcoin was due this correction and this is healthy for the ecosystem in that it didn't go any higher," he said. That's something you could also say about equity markets, but we'll come to that in a moment.

"The regulatory moves are quelling the irrationality of the market and will bring rigour and long-term stability," says Hayter.

Regarding the regulatory noise that is blamed for starting and accelerating the rout, he observed: "This is how nation states buttress themselves and their financial systems against the nature of cryptography and virtual world of the internet."

Bitcoin has seen many corrections deeper than the current one, which now amounts to a 70% fall from the high in December. Hayter is far from persuaded that this is the beginning of the end for bitcoin. "This is a large short-term correction – nothing more," says the cryptocompare boss.

Ending credit cards fuelling the fire

Banks in the US and later the UK introducing rules to bar their customers from using credit cards to buy crypto, was the latest negative news for markets to grapple with.

Lloyd's Banking Group, which has 25% of the credit card market in the UK, announced on Sunday that it would stop customers buying crypto on credit, as it feared debts may not be paid. Debit cards can still be used to buy cryptocurrencies.

Hayter sees the bank action as sensible and welcome. "The credit card blocking was a sensible move – allowing people to buy speculatively on a loan has had historical precedence for being imprudent and adding fuel to the fire."

China bans buying crypto abroad, Litepay launches

Regulators clamping down on crypto has pushed markets lower following what turns out to have been unsustainable rally to near $20,000. China began the most severe of those hostile actions early last year and this week indicated it was not finished yet.

China has now banned citizens from trading crypto abroad or taking part in initial coin offerings (ICOs) based outside the country. The overarching nature of the new regulations will also affect non-crypto businesses, making it more difficult for tech companies with overseas operations and stock exchange listings to conduct dollar-denominated and other currency transactions.

Bitcoin's failure to hold above $9,000 began on Sunday, and crashing through major support at $7,600 and $7,000 dragged the rest of the market lower.

One coin bucking the trend, at least initially, over the weekend was Litecoin, a long-time fork from bitcoin that has faster transaction times, lower fees and is less processor-intensive to mine. At one stage on Sunday the coin was up 15% in amidst a sea of red, as traders reacted to news of the launch of Litepay in the US ( https://www.litepay.us/ ), which aims to make it easier to use the cryptocurrency as a means of payment. Litecoin has team up with crypto payments provider BitGo to launch the service.

What will turn the market?

Looking further out, the crypto market needs to see blockchain projects start to deliver on the promise of the technology. After all, the internet revolution saw websites and email start to get mass adoption very quickly, while blockchain applications, by comparison, have seen no such adoption breakthroughs, other than bitcoin itself and Ethereum as a vehicle for raising startup funds through ICOs.

Hayter is looking to established players to release some of the first products: "Companies such as Starbucks, Facebook and Telegram are a few of the incumbent tech firms looking at the space." Also, on Facebook's crypto ad ban that knocked markets last week, he sees it as a positive development. "Facebook's move to ban ICO advertising in its boiler room format was again the right thing to do."

And cryptocurrencies are not standing still, Hayter reminds market participants: "We will only see the quality and functionality of crypto currencies improve in all their guises – whether it's as rewards, platforms, currencies, bearer certificates or forms of utility and trust."

Could correlation with equities turn negative and lift crypto?

Market watchers may be pondering whether the crypto market action can, in retrospect, be seen as prefigurative of the wider pull back in global equities markets.

Of course, the volumes in crypto are but a pinprick in comparison to world equity and bond markets. That's not the whole story though. Investment decision-making is often sentiment and psychology driven. Plummeting crypto market will have been noticed by mainstream investors given that, for example, 60% of Americans are thought to have heard of bitcoin, according to one survey.

That may be more supposition than fact perhaps, but certainly some of the money that entered the crypto markets introduced new investors/speculators to the equity markets, particular tech stocks, and also the other way round, with tech investors being drawn to crypto.

Violent downside lurches can force the liquidation of positions, which can involve investors having to sell assets in one class to cover losses in another. It's hard to say to what extent that is happening at this stage, and the equity markets probably see buyers returning sooner rather than later. And, given that bitcoin has been happily falling all by itself for several weeks with no help from equities, the crypto/equities synchronisation thesis may not stack up in terms of volumes and trades, but perhaps it doesn't have to and it's all about perception for now.

There are similarities in other ways, as we see bulls in both markets deploying similar arguments. It's a healthy correction and fundamentals are good are two attitudes held in common.

However, the most interesting consideration from the view of crypto traders and investors is whether a negative correlation emerges between equities and crypto. At the moment, it is a positive correlation, with both markets going down as if they were holding hands. Nevertheless, things move a little quicker in crypto and perhaps the bottom will be in place before it is in equities, where a more fundamental shift in sentiment marked by the definitive end of the low interest, low risk, low inflation environment, is currently taking place, which could drag out for months interspersed with bouts of extreme volatility.

If bitcoin starts to rise from a bottom somewhere around $5,000 or in the $4,000-$5,000 range, with equities still repricing for the "new normal", then that sort of negative correlation would put wind in the sails for the cryptocurrency.

BIS says crypto a bubble, Ponzi scheme and eco disaster

However, the co-ordinated feel to both recent regulatory moves and banks in the US and Europe banning credit card purchases has further to run, especially if crypto prices surge again.

In a reminder of that, Bank for International Settlements (BIS) spokesperson Agustin Carstens, said that central banks need to stand ready for "policy intervention". Carstens described the bitcoin somewhat disparagingly perhaps as "a combination of a bubble, a Ponzi scheme and an environmental disaster".

Despite the comments from the BIS, many central banks have ongoing pilots testing cryptocurrency, and where fiat isn't trusted or sanctions are impacting on economic activity, there have been intriguing developments.

Hayter points to Venezuela and Russia for clues to some of what that central bank crypto future might look like. "National currencies will have their varying pedigrees from your Venezuelan speculative reserve-backed gamble, to your sanction-eroding crypto rouble et al."

He continues: "Again, these, when fully mature, will have a large part to play in increasing the velocity of money and hopefully lifting GDP and wealth for all."

Altcoins hammered, Tether still working

Today there is no green among the top 100 coins, according to coinmarketcap.com, with many down more than 20%. Bitcoin domination has ticked up to 36% indicating that the cumulative impact of the sell-off in altcoins is deepening, which perversely could provide a bit of support for bitcoin in that it is the coin on the other side of those sales on altcoin exchanges, assuming traders are not moving directly into Tether's USDT coin.

Despite the doubts surrounding the USDT "stablecoin" and its peg to the dollar, it is currently working as it should and serving as a stable repository for funds looking for a safe haven to shelter from the bearish storm.

With the largest intraday drop in Dow Jones Industrial Average history and volatility, as measured by the CBOE Vix index, doubling in a couple of days, the dangers of contagion begin to rise, despite solid fundamentals in industry, reflected in the US wage rises news last week that triggered the global stock market correction.

Perversely, some bitcoin 'hodlers' if reddit is anything to go by, have welcomed the equity pull back as bitcoin's opportunity. However, the virtual currency is far from out of the woods yet as market watchers wait for an expected fall to $5,000.

US Congress crypto hearings and Dr Doom

All eyes will be on the Capitol Hill today when market regulators will be questioned at a Congressional hearing on cryptocurrency and, in particular, the advent of bitcoin futures and the possible risks that has opened the financial system to. The futures issuance was done with relatively little oversight from the Commodities and Futures Trading Commission (CFTC) because the issuers were able to go down the self-certification route.

Economist Nouriel Roubini, also known as Dr Doom having predicted the 2008 crash, last week dismissed bitcoin as the biggest bubble ever, and today said in a tweet: "As expected bitcoin now crashes below $6,000. Now the $5K handle is reached. And the US Congressional Hearing on Crypto-Scams is still a day away. HODL nuts will hold their melting Bitcoins all the way down to ZERO while scammers and whales dump and run...".

HODL refers to early-stage bitcoin true-believers holding their coins for the long term, and is based on a 2013 post on the bitcointalk.org forum and the misspelling of "Hold". It is sometimes considered an acronym for "hold on for dear life".

Both Christopher Giancarlo, chairman of the CFTC and Jay Clayton, chairman of the Securities and Exchange Commission, will both give evidence to Congressional representatives.

Last word to Hayter who, predictably, has a somewhat different view to Roubini.

Although he worries that regulatory overreach could stifle innovation, he emphasises the positives. "The potential of this technology is [as] a dimension-eroding value transfer system in the new technological world. It needs the old world to give it tried-and-tested lessons in terms of rules and principles – but not so much that its innovative elements are stifled and snuffed out before they have a chance to shine."

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