Bailing out of bitcoin

Word from the US Commodity Futures Trading Commission (CFTC) that initial coin offerings (ICOs) come under its oversight, seems to have helped encourage profit-taking after bitcoin climbed to historic highs around $5,800 on 13 October.

Over the past 24 hours, bitcoin is trading down 7% at $5,265 and Ethereum has pulled back from its recent high of $346, falling to $296, a drop of 8% today.

The CFTC comments follow in the wake of the US Securities and Exchange Commission's July announcement that ICOs would be reviewed on a case-by-case basis to ascertain whether they are securities, a move which has seen an increasing number of ICO promoters barring US residents from participating in token sales.

Selling pressure may also have accelerated on the news that some customers of the popular US-based Bittrex exchange were having difficulty getting funds out.

The exchange announced changes to its rules last year regarding anti-money laundering compliance and has only recently started rolling out the changes.

Customers attempting to move large sums who haven't previously verified their account with Know Your Customer details, such as government-issued photo ID and implementing two-factor authentication, are now being hit with caps on the amounts they can withdraw. The new terms were brought in by the exchange on 1 August.

Selling of bitcoin has been strongest in South Korea, Japan and the US. The price retracement also happens to coincide with the opening of the Chinese Communist Party Congress.

Market participants hope that, after the Congress, the Chinese government will roll out fresh regulations on cryptocurrency exchanges following the recent shuttering of exchanges and the banning of ICOs by the country's financial regulators.

That remains to be seen, but if past form is anything to go by, previous selling pressure in response to regulatory tightening has usually since the bitcoin price bounce back because, ultimately, regulation is a positive for an industry striving to attract mainstream investors.

The president of Brazil's central bank Ilan Goldfajn, speaking on the eve of regulations to be introduced in the Fintech and crypto sector, further dampened bullish spirits by dismissing bitcoin as a speculative bubble.

"The bitcoin is a financial asset with no ballast that people buy because they believe it will appreciate. That is a typical bubble or pyramid [scheme]," he said earlier this week.

Dutchman Didi Taihuttu and family are probably hoping the declines in the two leading cryptocurrencies will be short-lived, given that they have sold their house and everything in it to invest in cryptocurrencies.

Taihuttu sees crypto as "a revolution that's going to change the monetary system", but has broken the age-old rule of portfolio allocation, which posits that only 1 to 5% of a portfolio's holdings should be put into alternative investments.

He plans to make enough for the family to live on by trading the two main cryptocurrencies bitcoin and ether in addition to Ripple (number three by market capitalisation, according to coinmarketcap.com) Neo (No. 8), Dogecoin (No. 54) and XLM (No. 16).

Neo, dubbed the Chinese Ethereum, was up as much as 12% against the dollar earlier today, but has since fallen back to trade down 5.5%.

Bitcoin sees a fork in its software code on 25 October that will lead to the creation of a new coin called Bitcoin Gold, which doesn't seem, as yet, to be acting as a price driver given that bitcoin holders will receive a free proportionate number of Bitcoin Gold coins.

Also, a mandatory hard fork is expected in mid-November with the full implementation of the SegWit2x transaction scaling solution, although opposition to the changes is mounting in some quarters, which could be a factor that weighs on future near-term price advances.

Ethereum's recent 'Byzantium' hard fork software upgrade, despite some bugs that were squashed before the rollout, seems to have gone live without too much of a problem, although there are still risks as not all computers on the network have upgraded yet despite the requirement for them to do so.

In other news, a report from data analytics research firm CBInsights on corporate investment in blockchain start-ups, found that $327 million has been invested so far this year alone, compared to $390 million for the whole of 2016, with the most active firms in the space being Google and Goldman Sachs.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.