After hitting $20,000 in mid-December, bitcoin prices keep drifting lower.
Looking at the news, it’s clear to me why this is happening.
On Monday, the Financial Industry Regulatory Authority (FINRA), the organization that regulates brokers, advisers and financial institutions in the United States, announced that it was going to focus on cryptocurrencies.
FINRA is a big deal if you manage money or if you are a financial adviser … you have to follow its rules and subject yourself to its examinations.
Merrill Lynch, one of the biggest financial broker and advisory companies in the U.S., banned any cryptocurrency investments in its accounts.
The Chinese government this week announced a plan for an orderly end to bitcoin mining.
That’s right after Visa Europe canceled cards that allowed users to access bitcoin.
This comes right after the South Korean government started requiring real names for all cryptocurrency transactions. The government also banned banks from opening accounts for virtual currencies.
The Indian government is waging war on bitcoin and cryptocurrencies by choking the flow of cash to anyone who’s trading these assets.
If you’ve been in markets long enough, you can see a familiar pattern here…
Putting the Squeeze on Cryptocurrency Investments
This rapid-fire set of announcements looks to me like a coordinated squeeze on cryptocurrency investments. And it reminds me of a similar squeeze that I personally experienced before where I lost money.
PartyGaming. Sportingbet. PokerStars. 888 Holdings. You’ve never heard of these companies, even though they were once highfliers in online gambling through poker.
The thing is, online gambling is illegal in the United States. And most of their customers were U.S. citizens.
These companies skirted around U.S. law by operating their websites from places like Costa Rica, the Caribbean and the United Kingdom. For a while, the U.S. government tolerated this activity.
Then, on October 2, 2006, the government lowered the hammer.
It secretly added rules into a transportation law called the SAFE Port Act. These rules made it illegal for American banks and credit card companies to process payments to online gaming companies.
By doing this the government chopped off the lifeblood of these businesses — money flow.
You see, everyone gambling online used credit cards or bank transfers to fund their betting. If you made it illegal to process transfers to online gambling companies, you starved these companies of their source of cash.
Overnight, 90% of their sales disappeared. Instantly their stocks crashed. They never recovered.
A Big Threat to Government Power
So here’s why this matters to bitcoin and cryptocurrencies.
I believe that governments are looking to crack down on bitcoin and cryptocurrencies because they see them as a threat to their monopoly power to issue currency.
Governments around the world derive great power from their ability to issue their national currency. It’s completely against their interests to have a new currency compete with their monopoly in issuing currency.
The fact that people are using bitcoin and cryptocurrencies to transfer wealth, avoid taxes and for illegal activities is also a big threat to government power.
If everyone shifted to bitcoin or cryptocurrencies, then the government’s tax collection would go to zero. And it could lose its ability to enforce law and control the economy.
The bottom line: Bitcoin and cryptocurrencies represent a threat to a government’s power.
Cutting off the Money Flow
The U.S. China. South Korea. Europe. India. These are substantial markets for bitcoin and cryptocurrencies.
These governments know banning bitcoin and cryptocurrencies can cause social and political unrest. Instead, they are going to squeeze them dry using the same technique they used to get the online gaming companies: They are going to starve the cryptocurrency exchanges of money flow.
Cutting off the money flow from new clients and cash will slowly dry up the trading and liquidity in bitcoin and cryptocurrencies. The government will keep squeezing until these markets are no longer a threat to them.
Now, those who own bitcoin and other cryptocurrency investments are going to dismiss this threat. They believe that bitcoin and cryptocurrencies are going to stay strong even as governments put the squeeze on these assets.
I believe they are wrong. And my experience with online gambling stocks is just one example of how harshly governments will act when their powers are threatened.
Editor, Profits Unlimited