Bitcoin bounces – but only after dipping below key level of $30,000. What’s next?

Bitcoin has rallied this morning, after dropping below the $30,000 mark yesterday, amid an ongoing spate of bad regulatory news.

As of Wednesday morning, the world’s most popular cryptocurrency is up 6% hovering around $31,402.

This came after the cryptocurrency hit a session low of $29,300 yesterday. The last time bitcoin was this low was on 22 June.

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So is the bounce the start of a rally? Or is it likely to be more short-lived?

Regulators are paying more and more attention to crypto

This time the regulatory crackdown came from Europe as the bloc’s regulators announced plans on Tuesday to make it easier to trace cryptocurrencies.

“Given that virtual assets transfers are subject to similar money laundering and terrorist financing risks as wire funds transfers, it is to requirements of the same nature they must also be submitted and it therefore appears logical to use the same legislative instrument to address these common issues,” the European Commission said in a statement.

Cryptocurrencies were facing somewhat of a “double whammy” day as Europes’ clampdown on bitcoin also coincided with calls by US Treasury Secretary Janet Yellen to establish a regulatory framework for stablecoins, a rapidly growing class of digital assets, which have also alarmed regulators.

Stablecoins are a rapidly growing class of virtual currencies which involve the cryptocurrency being fixed to another cryptocurrency, fiat currency or a basket of commodities. The USD Coin and Tether are the most popular stablecoins.

It is not hard to see why regulators are getting uneasy about stablecoins. In effect, they are “shadow currencies” – notionally pegged to the value of a major currency such as the US dollar but without any of the regulatory or governance apparatus.

Regulators agreed at a meeting that greater due diligence is required for stablecoins.

“In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate US regulatory framework in place,” the US Treasury said in a statement.

So where do we go from here?

While bitcoin is bouncing for now, the risk is that – as technical analysts point out – the more often an important price level is breached, the more likely it is to give way.

My colleague Dominic last month noted that if $30,000 is breached multiple times, then the next stops could be $20,000 and even $12,000.

It’s a far cry from the start of the year when bitcoin and many other cryptocurrencies soared for many reasons. Greater acceptance by Wall Street, unrivalled bullishness by Tesla’s Elon Musk and some “hodlers” perceiving bitcoin as a hedge to rising inflation prices, all helped the cryptocurrency reach a peak of almost $65,000 in May.

But many of those reasons to be optimistic have now faded away. Musk has blown hot and cold on crypto. Bitcoin mining’s impact on the environment has become a much bigger talking point. And interest from Wall Street has coincided with interest from regulators. Most notably, China banned cryptocurrency mining and its country’s financial institutions from participating in this space.

After bitcoin’s bull run in Christmas 2017, the cryptocurrency gave up more than 80% in 12 months, notes John Authers in his Bloomberg newsletter. The current descent from bitcoin’s most recent peak follows the same pattern.

Maybe that doesn’t foretell the future. No one has a crystal ball. But as Authers puts it: “Bitcoin’s history rhymes so strongly that it’s hard to dismiss as coincidental.”