When it comes to trading stocks, to a certain extent, investors know what to expect. Stocks are heavily regulated, and these regulations protect investors from fraud and other risks. However, when it comes to cryptocurrencies, government regulations have yet to be put in place. This means the crypto markets carry less certainty with them, and hence, a greater risk than the stock market.
For some investors, this has been a boon. Early crypto investors spent the previous decade profiting in the space despite, and perhaps because of, its unregulated nature. This was partly because these early investors seemed to find the lack of regulations a compelling reason to join in. In fact, many of these investors subscribed to the theory that cryptocurrencies could eventually change the very rules of global finance.
At their high in November 2021, cryptocurrencies combined reached a $2.9 trillion total market cap. Obviously, this is a drop in the bucket compared with the stock market’s $48 trillion value. But for an asset class that was little more than a decade old, it was significant.
However, since its 2021 peak, Bitcoin (BTC) has lost more than 70% of its total value. The crypto markets overall are now worth less than $1 trillion. Not to mention, it now looks like government regulations could be coming soon.
In March 2022, President Joe Biden signed an executive order to provide a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” In addition, 10 countries have already launched a digital currency, and China intends to follow suit as early as 2023. In fact, more than 100 countries are exploring starting their own cryptocurrencies, and these countries combined account for 95% of global gross domestic product.
While some crypto investors are panicking, others are looking forward to what a regulated future could hold. Let’s dig into what regulations might mean for investors and the price of cryptocurrency assets.
How Regulations Could Affect Investing in Cryptocurrency
“Regulations are a positive aspect for the industry,” says Adam Reeds, founder, and CEO of Ledn, a crypto-backed lending firm, because “many institutions and larger established groups are waiting on the sidelines.” In fact, he believes many of these institutions would like to invest in crypto, but a lack of regulations simply makes it infeasible for them.
In addition, regulations “should create a framework where there are disclosures,” says Katherine Dowling, general counsel, and chief compliance officer for Bitwise Asset Management. These disclosures, Dowling goes on to say, will help create transparency for the overall investment class.
The importance of transparency for institutional investors cannot be understated. Due to the risk-management nature of institutions, there must be a risk profile for each investment. These kinds of risk profiles can only be built for transparent assets, which cryptocurrencies simply aren’t yet.
This wasn’t the first time a cryptocurrency had caused severe financial hardships for investors. Ethereum’s DAO coin failed all the way back in 2016 due to a hack, which led to the theft of $60 million in Ethereum’s Ether (ETH) coin. Eventually, Ethereum’s underlying blockchain was forked and the stolen currency was returned, but the experience had profound effects. Not the least of which was the Ethereum community now having two different blockchains: Ethereum and Ethereum Classic.