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Bitcoin is rebounding and has crossed $9,000 mark

After drastic fall in value over the recent weeks, Bitcoin, the most famous of the cryptocurrencies, has started to bounce back, and has crossed US $ 9,000 mark again. While it’s a long way off its spectacular price of nearly US $ 20,000 in December 2017, the upturn from the sub-US $6,000 range is quite noticeable.

Bitcoin is back to 9k and heading to $10.000

There are plenty of reasons for the drastic fall in the price of Bitcoin in January and February of 2018, an obvious one being the very nature of cryptocurrencies. Cryptocurrencies are mathematical money, not backed by any tangible asset, and not guaranteed by any central bank. This naturally introduces a degree of speculation. However, the recent drastic fall had several other reasons, some of which are following:

  1. The history of criminals abusing Bitcoin: Almost since its inception, the relative anonymity offered by Bitcoin, which is true for the other cryptocurrencies as well, have allowed criminals to pay for their illegal activities using Bitcoin. A user can have multiple identities using which he can transact using Bitcoin, and it’s very hard to link all of his identities to him. Law enforcement agencies have struggled since long to follow the money trail when crimes have been financed using Bitcoin. It’s only very recently that Bitfury, the Bitcoin mining and blockchain transaction processing company, has announced their solution “Crystal”, which will use clustering technology to link multiple identities of a user back to the user, in the blockchain underlying Bitcoin.

  2. Series of high profile hacking incidents of Bitcoin exchanges didn’t help the matter either, the most recent example being the January-2018 attack on the Japanese cryptocurrency exchange Coincheck, where hackers made off with US $ 530 million. In terms of monetary value, this is the biggest hack of a cryptocurrency exchange so far.

  3. According to recent analysis, energy consumed by Bitcoin mining operations in Iceland will surpass total domestic energy consumption in the country, within the year 2018. The huge energy requirements of the Bitcoin mining rigs point to immense strain on environment. At a time when countries are increasingly looking at renewable energy sources to reduce their Carbon footprint, spending so much energy to create virtual coins that haven’t yet fuelled any major economic transformation anywhere in the world, is certainly questionable. This is another reason for which Bitcoin, and cryptocurrency mining in general, attracts a lot of negative press.

  4. Cryptocurrencies put a lot of power in the hands of people, due to the in-built decentralization. However, regulators, central banks, investigators, and political authorities are concerned that cryptocurrencies can disrupt many components of the policy framework in their countries. Tax evasion, large scale fund transfers outside of national boundaries, funding of criminal activities, weakening effect on national currencies, and the potential negative domino effect on financial inclusion programs in many countries are the reasons for their concern. Central bankers, investment gurus and political leaders in several countries have termed cryptocurrencies ‘Ponzi schemes’. Several countries have fully or partly banned Bitcoin, for e.g. Iceland, Ecuador, Bolivia, Russia, Sweden, China, Thailand, and Bangladesh. In February 2018, the government of India has clarified its stand on the floor of the nation’s parliament that they don’t recognize cryptocurrencies as legal tender and will do everything possible to prevent the use of cryptocurrencies to fund illegal activities.

Impact of South Korea on Bitcoin's fortune is profound:

While all of the above reasons have contributed to Bitcoin’s downturn, they are not necessarily recent issues. On the contrary, public pronouncements on part of South Korean government functionaries have had significant impact on the nosediving price of Bitcoin, and a perceptible change in their stance in the last week is actually contributing to its rebound.

South Korea enjoys a unique place as far as Bitcoin trade is concerned. For an economic powerhouse that South Korea is, the country has very little high yield investment options for common citizens. This has resulted into 3 out of every 10 salaried employees in South Korea invest into cryptocurrencies. Bitcoin, Ether and Ripple are very prominent in South Korea. Also, high unemployment among South Korean youth makes cryptocurrency trading an attractive option. 20% world’s Bitcoin transactions happen in South Korea.

However, South Korean government has been concerned about cryptocurrencies, and they have, in course of various statements and announcements, have voiced the following reasons:

  1. High degree of speculative trading in the cryptocurrency space;

  2. The fear that cryptocurrencies may take the place of fiat currency;

  3. Tax evasion, flight of capital out of the country, and funding illegal activities are easy with cryptocurrencies due to the relative anonymity they provide;

  4. The unacceptable trend of foreigners and minors trading in cryptocurrencies;

  5. Cryptocurrency trading accounts opened anonymously or with pseudonyms;

  6. Cryptocurrency exchanges evading tax;

  7. Chinese money round-tripping through South Korean cryptocurrency exchanges.

Park Sang-Ki, the justice minister in the South Korean government, stated on January 11th 2018 that all cryptocurrency exchanges in the country will be shut down, and a law is in the making that will ban all trading in the South Korean cryptocurrency exchanges. South Korean police raided the offices of Coinone and Bitthumb, two large South Korean cryptocurrency exchanges suspected of tax evasion. These developments had immediate effect on global cryptocurrency market, and the most famous of them all, i.e. Bitcoin, started its fall. Even earlier than that, i.e. on December 28th 2017, Bitcoin fell by over $ 1,000 after the South Korean government warned that cryptocurrencies are no replacement for fiat money and traders may suffer huge losses due to high volatility.

South Koreans investing in cryptocurrencies did not take kindly to these tough statements from government functionaries threatening to ban cryptocurrencies. A petition on the website of the South Korean presidential office asking the government to reconsider its stance on cryptocurrencies gathered more than 200,000 signatures by January 16th, forcing the government to respond. South Korean government has now indicated that banning cryptocurrencies was only one of the various measures being considered, and has also outlined the regulatory framework the government intends to bring in, as opposed to an outright ban.

The key components of the regulatory framework are the following:

  1. Banning anonymous cryptocurrency trading, instead open named crypto trading accounts with one of the six banks nominated for this purpose;

  2. Banning minors and foreigners from trading in cryptocurrencies on South Korean exchanges;

  3. Strengthen measures to stop funding of illegal activities using cryptocurrencies.

The idea of regulated crypto trading has been generally welcomed by the South Korean people.

Clarification of stand by the South Korean government, including a presidential statement, indicating that ban on cryptocurrency hasn’t yet been decided upon and it was only one of the options on the table, have been met with relief by the South Korean people, and the global cryptocurrency market. The resultant positive sentiment has certainly helped Bitcoin to reverse the downward trajectory.