How Will Cryptocurrency Regulation Affect Prices
Should cryptocurrency be regulated?
The prices of cryptocurrencies fluctuated a lot in 2017. Even though prices have gone up, there’s still a lot of uncertainty in the market causing prices to move very frequently.
The main cause of this precariousness is due to the inflationary nature of how cryptocurrencies came about. Also, cryptos are viewed more as being an investment and speculative asset. There are also other external issues that affect the price of cryptos.
When cryptocurrencies first came onto the scene, Bitcoin and other similar cryptocurrencies were given lots of attention. This led to the prices going up. This fast increase in price drew a lot of attention and interest from the public, who now became more interested in getting involved with cryptocurrencies. Moreover, it also shined a spotlight on governments and other regulatory prices and how they would respond to cryptocurrencies. This could still potentially affect the prices of cryptos, considering how past regulatory efforts have affected the prices.
A good example of how various factors affect financial markets can be illustrated by the post-crisis Dodd-Frank Act. As a result of the limitations that were put on deposit-taking banks, major financial institutions had to minimize their market-making undertakings in some asset categories, to attain increased capital ratios as demanded by the regulations in place. Consequently, the minimization of marketing-making liquidity negatively interfered with the price discovery process. The bond market was particularly affected since it is not as liquid, as let’s say the stock market or the foreign exchange market. This can possibly create a snowball effect that intensifies the movement of prices in certain directions instead of minimizing the overall unpredictability of prices.
Even though regulatory bodies would like to bring prices under control, the price of cryptocurrencies is largely dependent on speculation and how confident investors are about the market. Therefore, major changes in policy can have a big effect on prices in the short term. This is obvious based on various things that have happened in the past year.
Even so, the long-term effect is fuzzier since these regulations have only been in place for a few months. Even if the regulations help the market to be more stable in future, the more questions that are asked now, the more effective the regulations that are put in place will be. It will also determine the extent of the impact that the regulations have on prices.
Why Regulations Affect Prices
Cryptocurrency Price Analysis
When cryptocurrencies first came out, the market was not regulated at all. Also, regulators and international bodies did not want to associate with cryptos, so they kept their distance. This made the price of cryptos to go up with absolutely no hindrance.
It is only in 2017 that regulatory bodies began showing an interest in controlling cryptos in the market. By this time, cryptos had been largely unregulated for over ten years. This translates to regulatory bodies trying to control a system that was unrestricted and chaotic before.
Regulations started becoming more obvious, mainly because of the ICOs that were being carried out by blockchain companies. In 2017, Blockchain companies were able to raise $4 billion to fund their companies. This drew the interest of the Securities and Exchange Commission. The fundraising had its own set of challenges as well. There were some events that were made public that highlighted how lawless this whole process was.
According to Hartej Sawhney, who co-founded Hosho (a blockchain and smart contracts company that does auditing and offers security), as of now, no regulatory entity is in charge of ensuring that Blockchain companies adhere to various standards and practices within the blockchain industry.
Also, some data breaches have taken place. This shows the weak security systems that most companies have in place. However, since there is no regulatory body overseeing them, such issues are ignored. This has a high effect on the prices of cryptocurrencies.
For blockchain companies to develop a more sophisticated blockchain ecosystem and for investors and exchanges to have more confidence in it, then it is necessary for a strong regulatory environment to be in place.
It’s important that regulatory laws be put in place. For example, Gibraltar has made clear regulations for Blockchain companies. This has resulted in a lot of blockchain companies moving their operations there.
Since cryptocurrency investors are used to an unregulated environment, they tend to think that introducing regulations in this industry could stunt the growth of cryptocurrencies. Consequently, this could minimize the unpredictability that has characterized this market.
The consequence of all this is that the market has become quite sensitive to any news about regulations being introduced in this industry. In case of any news or market regulation, the price of cryptocurrencies usually goes up or down, since investors will react by either buying more coins or selling what they have. This causes prices to be quite unstable. For instance, when Coinbase started investigating internal falsified practices and market manipulation, this caused the price of Bitcoin to fall by as much as half of its price.
A more recent case is when the prices of cryptocurrencies greatly plummeted because the South Korean government announced that it would completely prohibit cryptos or put in place a lot of regulations to control the cryptocurrency market.
This resulted in the price of Bitcoin falling by 15%. Litecoin, Ethereum, and Ripple also underwent significant price drops in market capitalization within a couple of hours.
However, there are some regulations that can have a positive effect on the market. For instance, when the South Korean government backtracked and handled the issue more positively, the prices of cryptos went up again.
Also, before the South Korean incident, Japan had positively embraced cryptos. This caused the price of Bitcoin to go much higher than it has ever been. When the Chinese government banned cryptocurrencies in September, it caused the prices to fall to $3, 000. However, this trend was reversed, and prices went up to $5,855 when the government announced the legalization of Bitcoin and its recognition as a new payment method. This led to many people in Asia rushing to buy the coin.
According to Adv. Aviya Arika, who is in charge of Blockchain Innovation at Porat & Co. Law Firm, there has been a lot of ambiguity when it comes to regulation of the blockchain industry. He is of the opinion that regulating this industry will indeed help the prices to get better, unlike what most people think.
The ban of cryptocurrencies by some governments, as well as the ambiguity of regulations, has negatively affected cryptocurrency markets.
It is hard for an investor to invest in cryptocurrencies if they are not even sure about the legitimacy of cryptos, leave alone how they are going to be taxed on gains made from crypto investments. This causes a lot of people to hold off from getting into the market, or they limit their involvement in the market as they wait for things to get better. This can cause the market to become bearish.
Conversely, if regulators were to make a stand in regard to the cryptocurrency market, then this will cause investors to become more confident about the investing in this market since they know what the regulators think about cryptos. This makes the investor more certain about how they will use cryptos, whether as a medium of exchange or a form of currency or in whatever another form.
I tend to think that as a lot of governments get involved in regulating cryptocurrencies, then this will make the crypto market to become more stable and a lot more people will embrace it.
Moreover, the introduction of cryptocurrencies as a mainstream investment has not been very even. For instance, the market fluctuated a lot causing trading to be stopped three times, due to wide price fluctuations, when the Chicago Board Options Exchange declared that they would start giving out Bitcoin futures contracts.
All in all, how the users feel about cryptocurrencies has a much greater impact on the capacity of the cryptocurrencies to retain their value. Since cryptos are much different from real-world assets like gold, then speculation will continue to be rife in this industry and people will still have mindless reactions and this will greatly affect price fluctuations.
The Future is Still Cloudy
Even though cryptocurrencies have been around for about a decade now, investors still do not know a lot about this industry. A lot of financial experts are still attempting to predict how prices will be in the future. It is only recently that regulators have taken an interest in this industry and they are now thinking up ways in which they can regulate it due to some of the risky behaviors that are rampant in this industry.
Regulators are aware that blockchain is the foundation of this industry. However, controlling the wider cryptocurrency market also affects the blockchain sector.
Also, the ICO issue is quite a major concern for governments, given that it can be abused through theft, fraud, hacking and other immoral actions.
Since this industry is still relatively new, it is quite hard to predict how regulations will affect it in the long term. Even though prices have widely fluctuated at times, the prices have self-corrected after some time. It will take time to clearly see the effects that regulations will have on this industry.
2018 will have a significant impact on how regulations will affect this sector. Meanwhile, investors should be watchful of seeing that there are likely to be more regulations put in place in future. This might cause some reactions to take place in the market in the short term, while it is still not yet clear how this will affect investments in the long term.
Discussions regarding cryptocurrency regulation were discussed during the G20 summit. Consequently, traders were concerned whether this would negatively affect the prices of cryptocurrencies or not. Generally, the prices of cryptocurrencies are generally sensitive and political or financial sector factors can affect prices greatly. For instance, when an important person in the Bank of England and FSB announced that cryptocurrencies were not risky for the world economy, this led to the price of Bitcoin spiking up to $1,000.
Nevertheless, the role that cryptocurrencies plays in the world is still under debate.
Given that the G20 did not come up with any finalized rules and regulations for the cryptocurrency industry, investors and traders are looking up to governments to see how the governments are going to handle this issue over the next one year. If there are any positive indications, this could lead to the price of Bitcoin and other cryptos going up. If there are negative indications and authoritarian guidelines or even a ban on cryptos, then the prices of cryptos will be negatively affected.
Can Regulations Stabilize Cryptocurrencies
The cryptocurrency market is decentralized and is not controlled by a single entity. However, there are some people who believe that having regulations can help to bring stability to the market. Japan has set up some self-regulatory entities that are not government related, which has caused more people to trust cryptocurrencies. If lots of people continue to put their faith in cryptocurrencies, then a lot more people are going to invest in this digital asset. This will cause the prices of cryptos to spike up, hopefully, this time around, the bubble will not burst.
The Future for Cryptocurrencies
There is still a lot of uncertainty facing how cryptocurrencies are going to be regulated and when. This is mainly because the market grew in an unregulated atmosphere for a long time. But due to the many security breaches that are taking place in this industry, there’s a need to put some guidelines in place, to prevent the market from becoming so volatile. The prices of cryptos tend to self-correct after some time despite the wide price fluctuations.
The main point of concern for regulatory bodies are ICOs. Therefore, there might be more focus put there instead of the whole cryptocurrency industry. 2018 will gauge the impact that regulations will have on price and the entire market. Japan has already put in place some guidelines. South Africa, Asia, and Europe also hope to do so shortly.