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Bitcoin investors are flying too close to the sun: analyst

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Jeffrey Halley, OANDA's Senior Market Analyst for Asia Pacific, joins Yahoo Finance Live to discuss the outlook for cryptocurrency, a potential Bitcoin regulation and the future of digital payments.

Video Transcript

JULIE HYMAN: Cryptocurrencies have calmed down to some extent, at least by crypto standards, I suppose. We are still seeing some action in Bitcoin. Right now, it's up about 2%. Earlier, when we checked, I believe it was lower, so continuing with volatility, both to the up and to the down side. Let's talk to somebody about crypto and where it's going from here.

Jeffrey Halley is with us, OANDA senior market analyst of Asia-Pacific. And Jeffrey, as you look at the recent moves that we have seen in cryptocurrencies, I know that you sort of have thoughts on what the long-term investable case is. I want to leave that aside just for a second and talk about the recent price action and where you think Bitcoin in particular is going to go from here.

JEFFREY HALLEY: Yeah, I often say that Bitcoin and the crypto space is a tradable asset and not-- but not necessarily an investable asset. So it has extreme volatility, and there's money to be made there. There's money to be lost there as well. And I won't dispute that one. And I wish all those traders the very best. I think it was very indicative that when it broke the 200-day moving average and crashed down to 30,000 very quickly, that there was very, very little liquidity.

So it very much behaves like an emerging market when things get tough. So the saying in emerging markets is, an emerging market is a market you can't emerge from in an emergency. And I think that's sort of indicative of the price action that we're going to see now. I think a lot of traders were taken out of positioning on that crash. And we're going to see even less liquidity going forward than we did.

I think equally, quite a few of them tried to get back in again as it rallied up off 30,000. But it is struggling above 40,000 now. And I'm just-- I'm not quite convinced just by looking at the technical picture that we're not going to see another big move down. We're going to see liquidity gaps now because a lot of positioning has been taken out of the market. So we're going to see cryptos in general gapping between price points as liquidity disappears.

MYLES UDLAND: Well, so and Jeff, in thinking about the role that emerging markets, emerging assets tend to play when it comes to the performance of more established markets, are you thinking that there won't be quite as much spillover perhaps as some folks have braced for, as the size of the crypto market has grown in absolute dollars. We still haven't seen too, too much of a weekend washout really dampening risk sentiment, at least so far as we've seen here in US markets.

JEFFREY HALLEY: Yeah, it's a very good point because until we saw that crash it seems like a lifetime ago, but I think it was the beginning of last week. And so we saw that. I didn't really feel there was a lot of cross-asset spillover. But actually, when the Bitcoin crashed along with the other cryptos, we did see a spillover. We saw gold rise. We saw some stocks coming under pressure. We saw the dollar rise. And I think investors, a lot of these investors are going to have multiple assets in their portfolios.

And it could well be the case that we saw in March last year where one position moves underwater, it has to be sold, and they have to liquidate other positionings and other asset classes to cover those losses. And I believe that the crypto market actually did hit a $2 trillion market cap when Bitcoin was at $65,000 a coin. That's a lot of money to get wiped out. And if it's still around a trillion dollars now, and it crashes by 30%, well, that's a big hit in the financial markets. And I think this will actually also draw the attention of the regulators. If we start seeing it spilling into other asset classes, they're going to start paying attention a lot more.

BRIAN SOZZI: Jeffrey, you talk-- I want to make sure I have this right. So you're talking about liquidity potentially drying up, regulators doing what they are known or likely to do, regulate. Do you think there's another crash coming here this summer?

JEFFREY HALLEY: I think there's a real risk now that I think-- I trace it back to this Colonial Pipeline saga. And I think that might be cryptos flying too close to the sun. They may have poked a sleeping bear just once too often and woken it up with regards to the regulators and/or governments. When you start launching attacks on United States infrastructure-- and we're seeing it going on in some other parts of the world at the moment, like New Zealand as well. When you start launching attacks on infrastructure and then taking the ransoms in Bitcoin or other cryptos, that's going to get the attention of some very serious and very powerful people at all levels of government.

And I believe that the China measures that we've seen are, in part, due to that. And it wasn't so much about the actual power draw at all. And I believe that the risk has ratcheted up exponentially now that blocs such as Europe and/or the United States actually start taking some measures to either regulate or partially ban cryptos, as we know it. So I think it does actually face an existential threat from that sector at the moment. And that will, of course, be bearish for those coins.

JULIE HYMAN: Do you think, though, that there's a scenario where you have that kind of regular-- you know, the crypto folks, Jeffrey, will say we want regulation. We welcome regulation, right? That's what they tend to say because they argue it will legitimize the cryptocurrencies in some measure. Do you see a scenario where cryptocurrencies can still rise in price and there is regulation?

JEFFREY HALLEY: It's a little hard to say because you talk to the original Bitcoin creators and the original pioneers in the space-- the whole reason for cryptos to exist is to be outside of control to have this libertarian, do what you want, and move money and procure goods and services as you wish anywhere in the world. It's only when this institutional money has emerged into the space this year that we've started hearing that. I struggle to see how they can actually coexist if governments and major countries around the world are going to regulate their use or even ban their use.

I do potentially see a future for digital coins like the digital Yuan. They're talking of-- the Fed's talking about a digital US dollar now. I can see those having a future. But I can't see them coexisting with what we've seen going on in the space at the moment, which seems, to me, driven more by speculative mania than underlying fundamentals at this stage.

JULIE HYMAN: Jeffrey, thanks so much. Jeffrey Halley is OANDA senior market analyst of Asia-Pacific. I don't know-- these days, you're a little bit of a lone voice in the wilderness, Jeffrey. So we'll see how it all pans out. Thank you so much for taking the time to talk to us.