Cryptocurrencies have enjoyed a boom during the pandemic. However, the Bitcoin bull run may be over as governments crack down on cryptocurrencies and a power outage in the Chinese Xinjiang region saw the price of several digital assets tumble over the weekend.

The news comes as the prices of Bitcoin and Ethereum have climbed to record levels during the Covid-19 pandemic. Even Dogecoin, which was originally created as a joke, has seen a meteoric rise over the year. It reached new record levels this weekend after Tesla CEO Elon Musk referenced it on Twitter. It is currently trading at just over 39 cents. It rose above 10 cents in January, having spent most of its previous life at well under half a cent.

Growing interest from the public, investors and companies like Tesla – which invested $1.5bn in Bitcoin in February – have fuelled the growth of the cryptocurrency market.

The sector reached new levels of success on Wednesday last week when crypto exchange Coinbase listed on the Nasdaq, falling just short of reaching a $100bn market cap on its first day of trading publicly.

On the day, Bitcoin reached a new record level of $64,747, up from about $7,000 a year ago. Since then, the price has fallen by almost 17%. It traded at $53,797 over the weekend, according to Coindesk. Other digital currencies experienced a similar drop, apart from Dogecoin.

Market experts and analysts have identified several factors that could explain the sudden plunge. The main reason cited is that lawmakers are seemingly about to come down hard on cryptocurrency.

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Rumours suggest that the US Treasury may soon announce a crackdown against money laundering done via crypto. Treasury secretary Janet Yellen has previously warned that Bitcoin is often used “for illicit finance.” It is favoured by cybercriminals, for instance ransomware gangs, who will often demand payments in Bitcoin for decrypting files they have encrypted during a cyber raid on a company or organisation.

Last week, Turkey’s central bank banned Bitcoin and digital assets being used to buy goods and services. It cited the risk of “non-recoverable losses” and fears over cryptocurrencies not being subject to “any regulation and supervision mechanisms nor a central regulatory authority”, and to protect against lira depreciation and inflation, Al Jazeera reported.

The Turkish central bank is trying to prevent the lira’s inflation from spiralling out of control after President Recep Tayyip Erdogan sacked the previous head of the bank in March. The central bank chief had aroused Erdogan’s rage by raising interest rates from 17% to 19% to prevent inflation. The president took issue with that, believing that higher interest rates cause inflation, contrary to traditional economic theory.

Other nations have already introduced stricter crypto rules. In the UK, the Financial Conduct Authority banned the sale of derivatives and exchange traded notes that reference certain types of cryptoassets to retail consumers in October.

Analysts also suggest that a power outage in the Chinese Xinjiang region could be behind cryptocurrencies’ recent tumble. The blackout was caused by maintenance work after recent flooding caused security risks. Some analysts believe that much of the world’s Bitcoin mining is done in Xinjiang, such that much of the distributed network which lets the cryptocurrency function is located there. Data website CoinMarketCap reported that the blackout caused almost half of the Bitcoin network to go dark for 48 hours.

While the prevention of mining ought to reduce the supply of Bitcoin and should arguably make the price of it go up, market analysts suggested that the outage highlighted just how fragile the Bitcoin infrastructure is, potentially explaining the price drop.

“The power outage does expose a fundamental weakness; that although the Bitcoin network is decentralised the mining of it is not,” Luke Sully, CEO at digital asset treasury specialist Ledgermatic, told Reuters.

Others suggested that the while the outage caused reduced processing power for the network that slowed down transactions, it shouldn’t cause any alarm.

Their argument was that hash rate shocks shouldn’t cause prices to drop. Hash rates refer to the volatility index of the processing capacity of the Bitcoin network that determines how much power miners need.

“The recent price drop is well within the bounds of typical volatility, it is noise not signal,” said Edan Yago, co-founder at Bitcoin-based decentralised finance protocol Sovryn.

Others simply stated that the cryptocurrency bubble over the past year has been due for a correction.

previous report by GlobalData Thematic Research goes into the matter in detail, arguing that the problem with cryptocurrencies is that they aren’t backed by anything, don’t add value to anything and that their price is entirely based on hype and speculation.

The “fundamental problem is that cryptocurrencies do not work,” the report’s authors write. They add that:

  • Cryptocurrencies slow down transactions instead of speeding them up.
  • Cryptocurrencies add middlemen instead of removing them.
  • Cryptocurrencies add cost to transactions instead of removing it.
  • There is no rational basis for the valuations of most cryptocurrencies.

“The current valuations of the different currencies are not based on their utility, nor are they any indicator of their future utility; they are based purely on speculation,” the analysts say.

None of this is true of cryptocurrencies’ underlying technology, blockchains, which can be deployed to reduce all those listed problems: but the currencies themselves bring nothing to the party.

Nevertheless, some are still bullish about the sector. For instance Dispersion, a London-based blockchain and cryptocurrency company which aims to remove intermediaries from financial transactions, has announced that it is planning to float on the London Stock Exchange. Dispersion might reduce some of the weaknesses of cryptocurrencies, and it would be only the second decentralised finance company to list in London. Dispersion is seeking a £25m valuation at its public debut.

Elsewhere in cryptocurrency land, UK Chancellor of the Exchequer Rishi Sunak has outlined a key set of initiatives to “boost growing fintechs, push the boundaries of digital finance and make our financial markets more efficient”.

Among those initiatives was the launch of a taskforce made up of HM Treasury and the Bank of England representatives, to explore a possible UK central bank digital currency, something Sunak referred to on Twitter as “Britcoin”.