Bitcoin heads for worst week since September as scrutiny builds

Bitcoin has lost a tenth of its value this week, putting it on course for its worst run since a steep sell-off in September, as global regulators turn their gaze towards the controversial cryptocurrency.

Despite a mini-rally on Friday, bitcoin was trading around $32,000 by late afternoon in London — on track for a second consecutive weekly drop after a dramatic rally through the turn of the year.

The move lower had been stoked by industry reports that the same token had been used in two distinct transactions, an event that would have broken a key rule of the market. This was later dismissed by the bitcoin community and analysts, who said that there was no “double spend”, and what was being seen was the normal process whereby the blockchain — the digital ledger that underlies bitcoin — resolves transactions.

“What was perceived as an ill-natured manipulation was in fact a perfectly normative blockchain event,” said Antoni Trenchev, a managing partner at crypto lender Nexo.

Many professional investors are staying away from crypto assets because of their price volatility and the lack of fundamentals such as profits or assets on which to build evaluation.

“Sharp swings in sentiment [are] a risk for cryptos,” wrote UBS analysts in a note to investors this week. “We reiterate our call for extreme caution on cryptocurrency speculation.”

But some investors are dipping a toe in the sector, after a breakneck rally last year that led to bitcoin surging 300 per cent. BlackRock, the world’s biggest asset manager, is opening the door to holding bitcoin-linked derivatives in two of its funds, the BlackRock Income Opportunities fund and the BlackRock Global Allocation fund.

In a filing with the US markets regulator this week, BlackRock noted that the use of cash-settled bitcoin futures could involve a high level of illiquidity risk and that future regulatory changes could lead to losses. 

Still, its move reflects what some describe as the growing institutionalisation of the crypto sector. BlackRock’s chief investment officer of global fixed income, Rick Rieder, said in November on CNBC that bitcoin could even replace gold in investors’ portfolios. Some analysts present it as an alternative inflation hedge to the precious metal.

BlackRock declined to comment.

“Bitcoin is a global macro asset and I think more and more traditional asset managers are realising its value as a portfolio hedging tool,” said Marc Bernegger, a board member at digital asset manager and broker Crypto Finance. “This is good for bitcoin because it means more liquidity and a healthier market.”

Both the UK’s Financial Conduct Authority and the European Central Bank argued last week that more stringent regulations should be adopted towards cryptocurrencies. 

ECB president Christine Lagarde said at a conference that bitcoin was “a highly speculative asset” and condemned the criminal activity often associated with the market. Janet Yellen, Joe Biden’s nominee to be the next US Treasury secretary, raised the prospect that US regulators could move to “curtail” the use of cryptocurrencies.

“More regulation is quite obvious because bitcoin is becoming far more relevant for the financial system,” said Mr Bernegger.