Cryptocurrencies are struggling to overcome rising bond yields. With regulatory constraints also increasing, the asset class may be approaching a tipping point.

Bitcoin was down 2% in early trading, trading at $41,700. Ether, the second-largest cryptocurrency, fell 3.4% to $3,140. The yield on the 10-year Treasury note increased to 1.84 percent, continuing a rapid rise this year and exerting particular pressure on the technology sector.

According to CoinMarketCap, the worldwide cryptocurrency market is down 2.9 percent to $2 trillion in market value, with Bitcoin accounting for 40% of the total.

When the "risk-free" yield on Treasuries climbs, investors withdraw funds from technology and other highly speculative assets. Increased risk-free yields boost the discount rate used by investors to determine the present value of future cash flows. Because technology valuations are predicated on future cash flows, the logic predicts that today's prices for the assets should be lower.

Increased rates also imply a drying up of market liquidity, syphoning out some of the leverage that has developed in crypto futures and other derivatives markets.

The regulatory environment is also becoming more challenging as a number of foreign governments and banking institutions place additional regulations on cryptocurrency.

Singapore issued a sweeping warning against cryptocurrency on Monday, emphasising that "the public should not be encouraged to engage in cryptocurrency trading." According to the Monetary Authority of Singapore, the country's central bank, cryptocurrency promotion should be limited to company websites and official social media accounts. Regulators appear to be outlawing cryptocurrency ATMs as well, claiming that they "mislead the public into trading...on impulse."

According to analyst Marcus Sotiriou of digital-asset broker GlobalBlock, over 170 companies that applied for crypto licences in Singapore have either withdrawn their applications or been denied.

Elsewhere in Asia, Pakistan and India are tightening regulations on cryptocurrency trading and deterring residents from participating. China, however, has taken a harsh line, declaring commercial transactions unlawful in September and renewing a ban on Bitcoin mining in November.

Cryptocurrency also faces challenges as bond yields rise and global liquidity tightens. If these trends continue, the coming year might make it significantly more difficult for crypto assets to gain value, particularly the smaller "alt currencies" being generated for various blockchain applications and DeFi applications.

Governments' perspectives on cryptocurrency are also divergent. While China and several other Asian governments are tightening down, El Salvador has gone the other way, legalising Bitcoin and announcing plans to issue a $1 billion "Bitcoin bond" with a 6.5 percent coupon.

According to media sources in Brazil, the government of Rio de Janeiro may invest part of the city's assets in cryptos, following comments from the city's mayor that "we are going to start Crypto Rio and invest 1% of the Treasury in bitcoin."

According to a recent research from Fidelity Digital Assets, the trends indicate that crypto is moving down distinct regulatory paths.

"There is a very high stakes game theory at work here, where countries that secure some Bitcoin today will be competitively better off than their neighbours," Fidelity added. "Even if other governments reject Bitcoin's investment thesis or acceptance, they will be compelled to acquire some as a sort of insurance."

One effect is that countries may be forced to purchase some Bitcoin as a hedge against future cost increases. "As a result, we would not be shocked to see more sovereign nation governments buy Bitcoin in 2022, and possibly even a central bank," Fidelity adds.

For the time being, though, crypto investors appear to be negative, as bond yields increase and demand for riskiest assets declines.

Support us!