Though Bitcoin has received the most attention, the introduction of a multitude of other cryptocurrencies has also sparked the interest of global investors — especially since many of these seem to be appreciating at a much faster rate.
This has even led some to view Bitcoin as a “store of value” similar to gold because it is more stable than other cryptocurrencies, and there is only a limited supply of the cryptocurrency that can be distributed. Most estimates assume that the last “new” Bitcoin will be mined around 2140.
As Bitcoin’s market price has begun to rise once again, so has continuing interest in other cryptocurrencies. But when it comes to options such as Ether and Ripple, recent events indicate that their prices could soon come under pressure in ways that Bitcoin investors won’t experience.
Here’s a closer look at why investors might want to think twice before choosing these alternative crypto investments.
Ripple and Ether experienced a major blow this week as Gary Gensler, a former financial regulator for President Obama, spoke out regarding the regulatory status of Ether and Ripple. In an interview with the New York Times, he said, “there is a strong case for both of them — but particularly Ripple — that they are noncompliant securities.”
The main problem, which affects many other cryptocurrencies as well, is that the tokens were first offered via Initial Coin Offerings (ICOs), a term used to describe crowdfunding a blockchain technology or company. The fact that tokens were sold before their networks were even fully functional further complicates the issue.
According to Gensler, these fundraising methods classify all such tokens as an investment security. And with his background, it is quite likely that Securities and Exchange Commission (SEC) regulators will listen to what he has to say.
Top investors, too, have weighed in on Ripple’s status including cryptocurrency investor Tim Draper, who said he believes that “almost every token out there is a currency” based on the fact that their proceeds go to the support and development of the token themselves. That would place them outside the purview of organizations such as the SEC.
Should Ether and Ripple be classified as securities, the two cryptocurrencies — which are the second and third-largest cryptocurrencies by market capitalization at $61 billion and $32 billion, respectively — would be in serious trouble. The coins and their exchanges would be subjected to much greater scrutiny, even potentially becoming illegal for non-accredited American retail investors to trade.
Should Gensler’s statements influence the SEC to label these currencies as securities, their issuers would likely fight the decision in court, which could take anywhere between nine months to five years.
Needless to say, such a change in the labelling and regulation of these cryptocurrencies could lead to a rapid fall in prices, proving potentially catastrophic for investors.
What makes Bitcoin different?
Despite Gensler’s tough assessment of Ether and Ripple, he didn’t offer the same condemnation toward Bitcoin. What was the difference? Some of the biggest factors include the fact that Bitcoin wasn’t first made available through an ICO, and that it is a truly decentralized currency.
Unlike Ether and Ripple, which are both linked to parent companies, Bitcoin doesn’t have a true owner — indeed, nobody really knows who actually created the currency in the first place. Nor is there a centralized entity that issues Bitcoin to new investors — most people earn Bitcoins through mining or receiving the cryptocurrency as a payment.
Indeed, in a move that stands as the polar opposite of Ripple and Ether being labeled as securities, Israel made headlines in March when its Securities Authority (ISA) officially declared that Bitcoin was not a security.
In addition to not having a central entity, the ISA statement also cited Bitcoin’s exclusive use “as a medium of payment, clearing or exchange […] not limited to a specific venture” as well as the fact that the currency does “not confer additional rights”, as justification for why it is not a security.
In other words, because Bitcoin is designed to be used for any type of purchase on any type of platform, it is much easier for governments to view them as a currency, not a security. The lack of exclusive memberships or incentives — as are often provided during ICOs — further solidifies this status.
Where will cryptocurrency go next?
With Nasdaq going “all in” on using blockchain technology to power transactions, it’s clear that the blockchain-based cryptocurrencies are here to stay. However, as these recent developments for Ether and Ripple indicate, attitudes toward cryptocurrency and the regulations governing these transactions are still in a state of flux.
Savvy investors would be best served by exercising caution and performing due diligence prior to investing, especially with the…