Chris Ratcliffe/Bloomberg via Getty Images
Bitcoin had a solid start to 2021, hitting an all-time high of nearly $65,000 in April. But the digital coin closed out the first half of the year down about 47% from its record — and a number of looming risks could result in further pain ahead.
While proponents appear to be holding onto bitcoin for now, other investors are wary about wild volatility in the market and what it means for their portfolios. With that in mind, here are five of the biggest risks facing the cryptocurrency as we enter the second half of the year.
One of the biggest risks for bitcoin right now is regulation.
In recent weeks, China has clamped down on its cryptocurrency industry, shuttering energy-intensive crypto mining operations and ordering major banks and payment firms like Alipay not to do business with crypto companies.
Last week, the global crypto crackdown spread to the U.K., where regulators banned leading digital currency exchange Binance from undertaking regulated activities.
Simon Yu, co-founder and CEO of crypto cashback start-up StormX, told CNBC that China’s moves should be viewed as a “positive” thing for bitcoin and other cryptocurrencies like ether as it will lead to more decentralization. However, he added that “over-regulation” of crypto in the United States could be a problem.
“As a country, the U.S. has too many departments regulating it from different angles — is crypto a security? A commodity? A property?” Yu said. “As of now, the U.S. hasn’t figured out how to properly regulate the industry, which oftentimes leads to decisions that are difficult for crypto to operate.”
U.S. Treasury Secretary Janet Yellen and other officials have recently warned about the use of cryptocurrencies for illicit transactions.
Last year, former President Donald Trump’s administration proposed an anti-money laundering rule that would require people who hold their crypto in a private digital wallet to undergo identity checks if they make transactions of $3,000 or more.
“We’ve long warned that shifting investor sentiment or regulatory crackdowns could pop bubble-like crypto markets,” UBS wrote in a note this week.
Another big risk is persistent, extreme swings in the price of bitcoin and other digital currencies.
Bitcoin rallied to an all-time record of around $64,829 in April this year, on the day of crypto exchange Coinbase’s blockbuster debut. It then tumbled as low as $28,911 in June, briefly sliding below $30,000 and turning negative for the year. It’s since risen back above $34,000.
Bitcoin bulls see it as a kind of “digital gold” — an asset uncorrelated to the wider marker that could provide sizable returns in times of economic turbulence. But while volatility can be good when the price of an asset is going up, it goes both ways.
While you would have doubled your money if you bought bitcoin in January and cashed out in April, today those year-to-date returns would be 18%. Still, that’s above the performance…