Bitcoin and the cryptocurrency market have enjoyed a surging bull market over the past six months. In 2017, Bitcoin burst onto the mainstream with a similarly stunning rise. However, this surge came to an end in the beginning of 2018. Regulators put Bitcoin and its peers into their crosshairs, and the fledgling digital currency space suffered because of it. Today, I want to discuss recent comments from Ray Dalio, the co-chief investment officer of Bridgewater Associates. In 2017, Dalio said that politics would continue to have an outsized impact on the performance of the stock market.
History has proven Dalio’s thesis. Will his recent prediction on Bitcoin come to pass?
Ray Dalio predicts stormy conditions ahead for Bitcoin
In an interview with Yahoo Finance’s editor-in-chief, Ray Dalio had this to say: “Every country treasures its monopoly on controlling supply and demand. They don’t want other monies to be operating or competing because things can get out of control. So, I think that it would be very likely that you will have it, under a certain set of circumstances, outlawed the way gold was outlawed.” Dalio went on to point out that India is already contemplating a potential ban.
On its face, the statement appears extremely bearish. However, Ray Dalio did heap praise on Bitcoin for proving itself as a legitimate store of value over the past decade. “It hasn’t been hacked,” Dalio said. “It’s by and large, therefore, worked on an operational basis . . . It is an alternative, in a sense, store hold of wealth.”
Negative comments from U.S. Treasury Secretary Janet Yellen and other big names drove down the price of Bitcoin in late February. Warren Buffett has also been a major skeptic. Ray Dalio is a major player, running the world’s largest hedge fund. These comments could generate more headwinds for Bitcoin. The top digital currency is already suffering and has shed about US$10,000 of its value since rising above the US$60,000 mark earlier in March.
There is historical precedent for this kind of government action
Ray Dalio is always a voice worth listening to. A ban on a store of value like Bitcoin also has historical precedent, especially during a difficult economic period. The Gold Reserve Act of 1934 made it illegal for American people to hold physical stores of gold, apart from jewelry and collectors’ coins. Indeed, several people were indicted in violation of the new law. Ray Dalio’s prediction for Bitcoin could mirror this ban.
It took 30 years for these prohibitions to be relaxed. In 1964, gold certificates were legal again for private investors. By 1975, Americans could again freely hold gold. Of course, this came four years after U.S. president Nixon moved away from the gold standard. Could Bitcoin become the victim of a similar campaign?
Should you expect a regulatory assault on Bitcoin?
Bitcoin’s 2020-2021 bull market has been bolstered by institutional support. PayPal allowed Bitcoin holders on its platform in 2020, and brokers like WealthSimple have also broken into the crypto space. The 2018 Bitcoin dip showed how new regulations could severely damage Bitcoin’s prospects. Governments moving to outlaw the top digital currency would likely have a devastating impact in the near term.
Purpose Bitcoin ETF (TSX:BTCC.B) was the first Bitcoin-focused exchange-traded fund (ETF) to be launched on a major index. The ETF has dropped 11% week over week as of early afternoon trading on March 25. Canadian investors should be very careful in a crypto market that already looks dangerously overheated. If Ray Dalio’s prediction rings true, digital currencies are going to take a major hit.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Ambrose O’Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and recommends the following options: long January 2022 $75 calls on PayPal Holdings.