In mid-June, 2019, the Libra project became officially public, with Facebook as one of the most important companies involved in the Libra Association, the Switzerland-based company which will be in charge of managing the project. Cryptocurrencies seen an impressive recovery during the first half of the year, fueled, among other reasons, by rumors related to this project. However, what pushed prices up first turned out to be a major drag, since the project announcement sparked a new wave of regulatory scrutiny.
News of Facebook launching a cryptocurrency irritated the regulators in the United States, according to cryptofrontline.com, who believe such a project will pose great risks to the global financial system. At the present time, Facebook has around 2.4 billion users and the magnitude of implementing a cryptocurrency project to such a wide audience might have unprecedented consequences.
Since then, the US Congress held multiple hearings, where David Marcus, a Facebook Representative in charge of the Libra Project, as well as Facebook’s founder and CEO Mark Zuckerberg, have been grilled. Scared by the reaction from the legislative side, a few companies that where part of the project already announced their withdrawal, but yet, cryptocurrencies continue to be under pressure.
Although Facebook announced it won’t move ahead with the project until all regulatory concerns will be addressed, the consequences that have arisen so far could heavily influence how public authorities will treat cryptocurrencies in the years to come.
Regulatory scrutiny back to 2018 levels
In 2018 we’ve witnessed the biggest bear market in cryptocurrencies when the global market cap dropped by more than 80% and many tokens lost more than 90% of their value. The cryptocurrency bubble popped around $815 billion in market cap when enthusiasm was high and people believe it was just a matter of weeks until the market would have reached $1 trillion.
It did not happen and cryptocurrencies started to weaken aggressively, primarily driven by increasing regulatory scrutiny. Scam ICOs had been unveiled, fraudulent companies exposed, cryptocurrency exchanges hacked, which enforced the need for regulation in this new industry.
Since this year’s summer, a similar situation can be spotted, although there had been some other important news. The Western World seems more motivated than ever to regulate cryptocurrencies and some countries, like France, Germany, and the United Kingdom had already taken steps in that direction.
Technical cryptocurrency buying?
Although there’s a huge debated around the current cryptocurrency weakness, looking at the bigger picture suggests something negative about the future market performance. We had an impulsive bull run in 2017, then a strong selloff, followed by a rebound in the first half in 2019. Since the rebound is followed by stronger selling, one could believe that the recovery was just technical buying.
With valuations so law at the start of 2019, buyers had seen many cheap opportunities, although most of the problems with cryptocurrencies had not been solved. If the weakness will continue until the end of the year, this scenario will be further validated. It does not bring a positive outcome insight since it could mean we will see the 2018 lows revisited again.
Between now and then, it will be important to watch how the main cryptocurrencies (Bitcoin, Ether, XRP, LTC, etc.) will manage to react around critical support levels. Bitcoin will continue the market bellwether and it should be watched how it performs because the entire market will be influenced.
Main catalyzers for the next few months
When it comes to future events, we should continue to monitor how the situation around Libra will continue to evolve. The US Congress is unlikely to give a green light to the project, but maybe we’ll start to see the beginning of a regulatory framework where cryptocurrencies could operate. In case we get hints that cryptocurrencies will be accepted as alternative payment systems in advanced economies, it will be a major catalyzer to the upside. However, the current political environment suggests digital assets represent a second-tier subject for cryptocurrencies.
Second of all, the cryptocurrency derivatives market should be watched. We have futures contracts on Bitcoin (both on CME and Bakkt platform) and some ETF proposals waiting for the SEC approval. We will continue to see prices influenced in a meaningful way by derivatives instead of traditional cryptocurrency buying and selling.
We can conclude that cryptocurrencies are not in the best position at the time of writing and until no positive news will show up, weakness could expect on the horizon. Both regulatory scrutiny and activity in the derivatives market should continue to have a meaningful influence on how cryptocurrencies will perform, which is why traders must monitor them. The market has a negative performance during Q4 for the second year in a row and that does not suggest strong interest to buy cryptocurrency.