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Ripple effects of XRP’s probable loss in the legal battle with SEC

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The price of XRP has been in downtrend for the last few days, after a lawsuit was filed against Ripple Lab Inc. by the US Securities and Exchange Commission (SEC), while other cryptocurrencies in the market bubbled with bullish rallies.

Earlier this week, the CEO of Ripple Labs Inc.,Brad Garlinghouse, took to his Twitter to announce the pending lawsuit against Ripple, co-founder Christian Larsen and himself, over the illegal sales of the XRP.

Ripple Labs Inc. and SEC have been in deadlock for years, over whether XRP is a security token that should be under the regulatory purview of the federal securities regulator. Despite Ripple Labs Inc. efforts to differentiate itself from XRP, the firm bags more than half of the token’s supply.

Several people in the crypto space like Chris Giancarlo, former chairman of the Commodity Futures Trading Commission, published a paper arguing that XRP is not a security token. While others also argue that XRP meets the Howey Test criteria which makes it a security token.

On Tuesday, the SEC charged Ripple to the Federal District Court in Manhattan. SEC is alleging that Ripple Labs Inc. and two of its executives, who are also significant security holders, raised over $1.3 billion through an unregistered, ongoing digital asset securities offering. 

Since the announcement of the pending lawsuit by the CEO of Ripple Labs Inc., the market value of XRP fell significantly by 14%– dropping to its lowest value since November and cancelling about 177% of last month’s gains. This has resulted in several exchanges temporarily halting trading or delisting XRP.

According to reports in the crypto space, if XRP is deemed to be a security token by the Court, exchanges that have listed XRP are at risk, largely because XRP’s liquidity will gradually dry up, and its market value will crash hard. On binance alone, XRP fell by 41%, over the past three days, due to the news of the lawsuit. 

Coin Center, a popular nonprofit advocacy and research group which supports the development of crypto-friendly policies, has said they will not be rendering any support to Ripple Labs Inc. in this legal battle with SEC. This was made clear by Jerry Brito, the executive director of Coin Center.

Yoshitaka Kitao, SBI Holdings CEO and Ripple Board member said via his Twitter handle that “Japan’s FSA has already made it clear that XRP is not a security. I am optimistic that Ripple will prevail in the final ruling in the US.” He further stated that “SBI Holdings remains a steadfast partner to Ripple, and looks forward to expanding together in Asia.”

The legal adviser of Ripple, Stuart Alderoty, also argued in the favour of Ripple, stating that the United States Government had already concluded in 2015, that XRP was a cryptocurrency. He further said that ” Last I checked, the SEC is still part of the US Government. Here’s the plus side – the industry will finally get the clarity it deserves. Goodbye “Howey test,” hello “Ripple test.”

Negative Effects on Crypto Space, If the SEC wins the lawsuit against Ripple Lab Inc.

The holders of XRP will be at huge loss, if XRP is declared a security token. Security tokens are not allowed to be traded via charts on crypto exchanges and as such, this will lead to a drop in its market value with zero or little liquidity. 

Also, marketplaces that continue listing XRP are at great risk if the SEC wins the lawsuit. Those  exchanges will have to face penalties for allowing retail consumers to trade an unregistered security token.

Large crypto companies might be considering exiting the U.S amid increasing frustration at the lack of SEC regulatory clarity. This might also lead to reduced adoption of cryptocurrency by the masses.

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Jack Dorsey‘s Square to develop open source Bitcoin mining

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Jack Dorsey Bitcoin

On Friday, October 15, Twitter CEO Jack Dorsey announced that American fintech company, Square, would be looking to get into Bitcoin mining. Jack Dorsey who is also Square’s CEO announced this on Twitter which subsequently sent waves through the bitcoin market, surging its price to almost a record high, rising over $62,000 over the weekend. According to the Twitter boss, Square is looking to building an open source Bitcoin mining system that would be available to individuals and businesses.

Sharing his thoughts further on the initiative, he stated that “Mining needs to be more distributed” and that “the more decentralized [mining] is, the more resilient the Bitcoin network becomes. He also mentioned the apparent inaccessibility of mining stating that “Bitcoin mining should be as easy as plugging a rig into a power source.

Dorsey also believes that bitcoin mining “needs to be more efficient and that “clean and efficient energy use” would be undoubtedly beneficial to the digital currency in the long run.

Dorsey ended the thread by saying that a “technical investigation would be undertaken by a Square team led by Jesse Dorogusker, Square’s hardware lead. If successful, this initiative would be another of Square’s bitcoin focused projects which includes a Bitcoin hardware wallet.

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Understanding Speculation and Crypto Volatility

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Everyone who dabbles in the crypto industry learns almost immediately that the market is very volatile and oftentimes things can change very quickly. That volatility is the fundamental reason why some investors make absolutely stunning gains in so short a time and others lose a lot of money as well. Trading in crypto is one of the riskiest ventures any person can undertake and as they say, it’s not for the faint of heart. The risks can be mitigated of course and sometimes depends specifically on the coin or crypto asset being traded on, barring general market trends.

Nevertheless, to get to the bottom of the volatility concept, one must understand speculation in the market. To start off, the concept of speculation isn’t limited to cryptocurrencies, on the contrary, speculation has existed for as long as economics and trading has. But it is worth saying that speculation is often a feature of novel sectors, assets, commodities and the like. So, even though cryptocurrencies have been around for more than a decade, they’re still in their infancy as far as markets go. One could say that the market is still trying to find its feet.

One of the fundamental reasons why cryptocurrencies are so volatile is that they are fundamentally backed by nothing of value outside the attention that they get. Unlike many fiat currencies which are either pegged to another currency’s value or whose value is unilaterally determined by a central authority, cryptocurrencies only derive value as a function of how many people are willing to use is to transact, i.e. trust in the asset because other people trust it. As a rule of thumb, the larger the number of people who accept the asset, the more valuable it becomes.

This is one of the hallmarks of speculative trading. In the crypto world or in any market that’s novel and untested, many people are in it to win it which means their strategies in trade has the objective of making as much profits as possible in the short term. Therefore, the market enters a subtly dangerous cycle of rapidly changing prices of assets. Basically, investors typically buy assets when prices are low and wait. As more investors are attracted to the commodity for its low prices, it sets off a cascade where more people buy in, causing the price to steadily rise. 

However, all good things must come to an end and it almost always gets to a breaking point whereupon the price gets high enough for investors to begin to sell. This reverses the earlier cascade and as more and more investors pull out, the prices can fall dramatically causing even more to sell off in fear of losing whatever investments they have left. The prices having fallen resets the game and primes investors to begin buying again.

Volatility has been one of the talking points of many critics of cryptocurrencies often comparing it to a Ponzi scheme. And in certain cases, persons of interest with large pulls and audiences can substantially affect the rate at which prices rise and fall. Other factors include government regulations. Volatility at its core reflects the often chaotic nature of trade and market interactions and human hopes and fears.

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Market Watch

What China’s crypto clampdown means for investors

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Over the weekend, China, the biggest crypto mining country once again, began to clamp down on cryptocurrency. Ten Chinese agencies including the central bank and banking, securities and foreign exchange regulators have vowed to work hand in hand to expose illegal cryptocurrency activity.

China has always placed stricter rules on cryptocurrencies but the new rule has made all crypto-related activities illegal. According to the People’s Bank of China (PBOC), it is illegal to cryptocurrency trading and anyone that does so will be severely punished; this includes those within China that are working for overseas platforms. To fully phase out the cryptocurrency mining sector, the National Development and Reform Council (NDRC) said that it would launch a nationwide crackdown on cryptocurrency.

Over the years, China does not recognize cryptocurrency as a legal tender. In 2013, the Chinese government referred to Bitcoin as a virtual commodity that individuals are allowed to freely participate in. This freedom, however, precludes banks and payment companies from providing services that are Bitcoin related.

In 2017, Initial Coin Offering (ICO) was banned. The ban was also extended to the conversion of legal tenders to cryptocurrencies by trading platforms which led most of the platforms to shut down operations in China. The crackdown led 88 trading platforms and 85 ICO platforms to withdraw from the market as of July 2018.

To China, the crackdown on cryptocurrency is necessary as the country is trying to launch its official digital currency and the need to fulfil its 2060 climate targets. The crackdown was necessary as cryptocurrency was seen as infringing on people’s properties and ‘disrupting the normal economic order.’

The statement by PBOC on Friday was unequivocal as the current crackdown is distinct from the previous ones. In his statement on Friday, PBOC called Bitcoin, Ether and Tether ‘legally irreparable’ and should not be used. The new regulations forbid financial institutions, marketing and IT providers from supporting crypto-related activities. The activities of both crypto holders and miners are now considered illegal. This is what Henri Arslanian, a PwC crypto leader termed as “No ambiguity. No room for discussion. No grey areas” in his tweet.  

What does this mean for crypto holders worldwide?

The major effect of China’s crackdown on cryptocurrency is the increase in price volatility. While volatility is a common phenomenon in the crypto world, a crackdown initiated by the world biggest cryptocurrency mining country will have a huge effect on market price.    

After the PBOC interview, Bitcoin fell by 4% within 24 hours and is currently trading at $43,320. Ethereum fell by 6% and it is currently trading at $3,036. With the Evergrande debt crisis and the huge blow bedevilling the crypto market, a clampdown by China would most likely keep the market price on the red until another good news crops up.

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