Digital asset risks grow as regulators tighten noose

The sharp fall in cryptocurrencies over the past week has proved that my warnings over the past two months were not misplaced, and I hope none of you got your fingers burnt.

However, there are still several investors who believe bitcoin's recent decline is just a temporary correction, so I would like further highlight some important points.

First of all, some investors have attributed the plunge in cryptocurrencies to China's fresh crackdown on virtual assets, after three regulators banned financial firms and payment companies from providing services relating to cryptocoins.

Some even believe that the clamp - from National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China - is just old wine in new bottles and just another move in the battle between China and the United States.

There are two major flaws in this analysis.

Firstly, before the regulators spoke out, Tesla was first to burst the cryptocurrency bubble after the electric car maker revealed it had reduced its bitcoin holdings. This was followed by founder Elon Musk saying Tesla would no longer accept bitcoins as payment for its cars, on the pretext of environmental concerns. Then came the investigation into Binance -the world's largest cryptocurrency trading platform - by the US Department of Justice and Internal Revenue Service, and finally came the statement from China's regulators. So, these analysts have obviously got the timeline wrong.

Secondly, China's efforts to strengthen supervision over virtual currencies have reached the level of the State Council, so these moves cannot be termed as "a new bottle filled with old wine." If people still think that China's crackdown on virtual assets is only due to its tussle with America, they are underestimating Beijing's determination to regulate virtual currencies and their impact on the mainland currency market.

Then, there are the endorsements by celebrities, which influence many in the market. After bitcoin's sharp fall, Musk tweeted that "Tesla has Diamond hands," implying that he would not be shedding his stake in bitcoin.

Meanwhile, Ark Invest CEO Cathie Wood, who has been hailed as the new goddess of stocks, said she still expects bitcoin to hit US$500,000.

The support from these celebrities led to a dizzying rally in virtual currencies at one point but it's Musk who lit the fuse for bitcoin's slump, so it's debatable whether his tweet means he's still firmly committed to the digital asset.

Also, I would take Wood's predictions with a pinch of salt. Many stock gods over the past decades were heroes of their time but once the trend was over, they too faded away.

Woods became famous because of her focus on tech stocks and virtual currencies, so it is logical she will keep the faith, but if the virtual currency bubble bursts, the damages for her will be huge. So investors should think twice before jumping on the virtual currency bandwagon.

Virtual currencies will, of course, exist in the future.

China's crypto crackdown, which came on the heels of the latest US clamp, shows the two nations are not battling each other by pushing down bitcoin.

Both nations believe that bitcoin and other digital assets - which are not their own offering of virtual currencies - have grown to a point where they are now a threat to the greenback and the yuan, and therefore have to be regulated.

So the future development of virtual currencies will see governments issuing their own digital assets based on their own currency. For instance, China has been actively promoting the digital yuan while it is believed that the United States will also try to develop a digital dollar.

Under such circumstances, bitcoin's development will be constrained and it seems to be inevitable that its price will go down further.

Andrew Wong is chairman and CEO of Anli Securities