The Fed has concerns about Facebook’s Libra – Bitcoin and other cryptocurrencies slump

While stock markets are holding all-time highs on the back of Federal Reserve Chair Jerome Powell’s speech last night, the cryptocurrency market has moved in the opposite direction.

Bitcoin is off around 2% to trade below $11,800 after yesterday’s comments from Federal Reserve Chair Jerome Powell.

Speaking to the House Financial Services Committee, Powell stated that:

“Libra raises serious concerns regarding privacy, money laundering, consumer protection, financial stability. These are concerns that should be thoroughly and publicly addressed.”

That’s the opposite of what the market wanted to hear. Traders were betting that Libra would work to allay institutional fears surrounding cryptocurrency. It is intended to be a stable cryptocurrency (tethered to a basket of fiat currency), overseen by a not-for-profit, and governed by a panel of industry big names including finance giants like MasterCard, Visa, and PayPal.

It seems that central bankers don’t see that this makes much of a difference.

Security concerns continue to hound Bitcoin

Criminality has always been one of the banes of cryptocurrency. The anonymous nature of transactions makes it useful for money laundering. On top of that, because crypto is usually stored in virtual wallets or on cryptocurrency exchanges, it is a prime target for hackers. The world’s biggest crypto exchanges have lost millions in Bitcoin and its peers over the past few months.

While many in the cryptocurrency community have claimed Libra isn’t a real crypto, parallels were always going to be drawn between the two. Libra could have opened doors for Bitcoin and the like, instead it could bring the regulators down upon digital currencies.

Powell has called for the project to be paused until regulators are satisfied that their main concerns have been addressed. Regulators have long-circled the cryptocurrency market, and the threat of action has been a key drag on crypto prices.

Libra could have sped up the process. There’s a chance this might work out for the best – regulation was always going to come, so maybe tackling the issue headlong could remove a barrier to the mainstream for BTC and its fellow altcoins.

But the fact remains that Powell’s attitude towards Libra is a fundamental punch to the speculative rally Bitcoin is currently undergoing. Adoption looks to be a long way off, and opposition to Libra means the best chance the crypto market has of mass adoption has already stumbled.

Bitcoin mining difficulty surges as miners follow the bulls

Just like traders, miners are piling back into Bitcoin as the price continues to surge. After coming off the boil once hitting a year-to-date high on June 26th, BTC has rebounded and is within striking distance of the key $14,000 handle.

The huge appreciation seen in Bitcoin has not gone unnoticed in the mining community. Miners earn newly-minted Bitcoin as rewards when they process transactions – using computational power to solve complex proof-of-work algorithms to verify transactions and record the data as a new block on the chain.

Competition for those rewards is heating up. Multiple miners work on the same bundle of transactions, but only the first to correctly complete the algorithm in the ‘block header’ adds their block to the chain and earns the reward. This is shown by the biggest two-week rise in mining difficulty in 12 months.

Difficulty is adjusted every two weeks to make sure that new blocks are added to the chain at a consistent rate. This is done every 2016 blocks – at a rate of 10 minutes per block this should take two weeks to discover the next 2016. If more blocks than that are added during the previous two-week period then the difficulty is increased to bring the rate of discovery back down.

Because of this, Bitcoins are always produced at more-or-less the same rate. No matter how popular BTC mining becomes again, the market isn’t facing an increase in supply – if prices are going to fall, it won’t be because of increased mining activity.

How does this affect the BTC outlook?

The increased mining difficulty does nothing to change market fundamentals, but it does signal increased confidence that at least some of the huge gains recorded during the recent rally can be consolidated.

Whether or not a break above $14,000 and a move towards the all-time high near $20,000 is on the cards, the signs are that the market expects to leave 2019’s $3,300 lows far behind.

Bitcoin rollercoaster, focus on G20, pound higher

Forex
Morning Note

Markets turn higher in Europe amid talk of a trade truce between the US and China ahead of the G20.

All eyes on the G20 in Japan and we’ve not had the most auspicious preamble – Trump has criticised the US-Japan defence pact, saying the Japanese would watch the US being attacked on a Sony TV.  

SPX marginally lower at 2913. It started as a more risk-on day, but the rally fizzled out. Defensives were the drag as growth sectors rose. Looks like bond proxies came off a little with diminished expectations for Fed rate cuts. We’ve got this strange balance between risk-on and risk-off right now that makes it a tough market to be in.

Asia was higher across the board. European markets are on the foot front, with the DAX leading the way. The FTSE 100 is close to the flat line around 7240. A stronger pound in early trade appears to be keeping the lid on the FTSE’s gains. 

Forex

GBPUSD drove up to 1.270 – look for a break above 1.2710 to suggest a sustained push higher. Dollar is coming off a touch this morning with a similar move in favour of the euro. But the yen back at 108 – looks like broadly risk-on environment ahead of the G20.

We can now expect an awful lot of news flow on trade and tariffs over the next two days so it’s wise to be cautious about reading too much into statements.

Cryptos

Bitcoin endured a tumultuous session, but bulls are regaining control of the situation. Bitcoin pushed higher towards $1,400 before it crashed around 21:30 last night, with futures dropping a staggering $2k in a few minutes.  

It looks to have been down to problems with the cryptocurrency trading platform Coinbase. These technical glitches have been resolved and Bitcoin was last trading around $12,500, still some way short of yesterday’s highs.  

Flash crashes like this can happen anywhere to just about any major market, but bitcoin seems particularly susceptible to them. This indicates that there is yet not the maturity or liquidity in this market than many of the crypto evangelists would like to think. Still volatile, still very risky – still Bitcoin. 

We’ve talked a lot about the catalysts for this rally and we have now another positive for Bitcoin – LedgerX has won CFTC approval to offer physically-settled futures and swaps contracts in Bitcoin. 

Commodities

Gold lower but holding the $1400 level. At send time it’s testing key support around that zone. Risky-looking head and shoulders for bulls. With the dollar creeping up and yields basing for now, we could gold pull back further. Ultimately if the Fed follows through with rate cuts and we a further depression in nominal and real yields we could yet see gold topping $1500 and even $1600. 

Oil – steady with little in the way of new news on Iran and uncertainty about the G20. Prices spiked yesterday after a big surprise drawdown in US inventories. EIA showed a 12.8m barrel draw, well ahead of forecast and coming after the API figures also showed a large draw on stocks. However bearish fundamentals are not abating and we need to see what the G20 brings, specfically the meeting between Trump and Xi. Brent holds $65, with WTI at $59. 

Equities 

Kingfisher – A new hand on the Kingfisher helm. Carrefour veteran Thierry Garnier is taking over from Veronique Laury. Removing management uncertainty may offer a modicum of support to shares in the near term but ultimately investors will want to see what new, if any, strategic direction the new CEO is planning. There should be scope for new management to drive change and carry out disposals that are necessary to make this a leaner business. Splitting up the business into smaller parts is an option. 

The entire ONE sourcing strategy was suspect from the off given that, for instance, the fittings and fixtures in Poland and Germany are not necessarily the same that are needed in France or the UK. Unification of the supply chain and joint sourcing has been the cornerstone of the Kingfisher turnaround strategy but has not delivered. Will there be an overhaul or will Garnier press on? 

Serco – more good progress as it bucks the outsourcer trend. Management today reporting 20% growth in underlying trading profit on 4% organic revenue growth. Order intake looks strong and FY19 revenues are seen at the top end of the £2.9-£3bn guidance. Underlying Trading Profit guidance is maintained at around £105m. The good work by Rupert Soames and co is paying off.  

Order intake boosted by £1.9bn in UK asylum accommodation and support services. It’s also enjoying greater profitability from the Carillion healthcare acquisition, which it bagged at a big discount in 2018. Nothing on Babcock but watch for more acquisitions. 

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