Shifting regulatory wind causing volatility in Bitcoin prices

Bitcoin’s recent price volatility chart looks more treacherous than this year’s Tour de France route.

The price ascension began when some of the world’s largest institutional investors indicated interest in cryptocurrencies. But this pack leader quickly fell out of line as a driver of the Bitcoin price. As prices climbed towards $7,000, the largest of those investors, BlackRock – with over $6trn in assets under management – quickly backtracked. CEO Larry Fink says Blackrock will look at cryptocurrency as an alternative currency when the market has price transparency and “you [can] identify who the players are on both sides.”

Next MasterCard was out in front, leading the price over $7,400. They filed a patent to process Bitcoin payments with the same speed and security as the MasterCard system does with fiat. But once again, the CEO sought to dampen the market enthusiasm. Ajay Banga, calling cryptocurrencies ‘junk’, says the digital money requires predictability and transparency before being accepted as a legitimate currency.

The price ran up to a two-month high of $8,400 on July 26, but was halted by regulators equally concerned about the opaque cryptocurrency markets. The SEC, the US securities regulator, rejected the Bitcoin ETF proposal by the Winklevoss twins for a second time, following the scuttling of a dozen other ETF proposals this year. Although the SEC indicated it does see a future for cryptocurrency ETFs in a market in which the virtual coins comply with the transparency and reporting requirements of regulated securities.

The determined virtual coin spent several more days flirting with $8,200 before falling below $7,000. A closer analysis shows that in Asian markets, where the regulatory hand is tightening its hold on the cryptocurrency market, regulation is instilling investor confidence rather than depressing the coin as early Bitcoin adopters feared.

Regulatory sweep

The spike of Bitcoin past $8,000 coincided with the spectre of currency devaluations across Asia. Viewing Bitcoin as the new gold, Chinese, Japanese and South Korean investors swapped some of their currency into Bitcoin. Like gold, Bitcoin supply is finite and not controlled by any government entity. Currently though, Bitcoin’s high price volatility relative to other asset classes makes it less suitable as a store of value and requires investors to pay higher premiums to hedge against price risk.

Japan

While the Asian flight to safety into crypto may surprise many, the Asian money is flowing into Bitcoin from the most proactive regulatory regimes. As Japan’s regulating of cryptocurrency exchanges in 2017 reduces the regulatory risk that looms large in the US markets, the Japanese cryptocurrency market has become one of the most stable and active. The yen, replacing the Chinese yuan as the most active currency in crypto trading, represents 31% of Bitcoin trading volume.

China

What the market legitimately feared was China’s more extreme regulatory approach of shutting down the crypto market by banning cryptocurrency trading and ICOs. In 2016, Chinese exchanges represented 90% of Bitcoin trading volume, while 95% of trading was in Chinese yuan.

Capital flight restrictions have sought to curb Chinese investment in foreign real estate and other assets, but the cryptocurrency door remains open, for now. In the face of the yuan devaluation, the Chinese have swapped more yuan for cryptocurrency this month. Currently, Bitfinex of Hong Kong, where much of China’s Bitcoin trading moved, has a 30% market share in global Bitcoin trading. China is now threatening to also prohibit offshore trading in cryptocurrencies and ICO investing.

South Korea

Crypto regulation is following Japan’s lead and sweeping through Asia. South Korea has created the South Korea Financial Innovation Bureau to oversee cryptocurrency exchanges and indicated it hopes to have cryptocurrency regulation aimed at ensuring investor protection and combating money laundering in place by the end of the year. The Korean yuan represents the third highest volume in cryptocurrency investment at 1.6%, following 57% in USD.

Singapore

Singapore is moving on cryptocurrency regulation but needs to tread lightly. Its current crypto-friendly environment has made Singapore a hub for crypto and blockchain startups. The Singapore Monetary Authority is seeking to lower the barriers to entry of cryptocurrency exchanges by reducing capital requirements and simplifying regulations.

Hong Kong

Hong Kong, which has been taking action against cryptocurrencies and ICOs on a case-by-case basis, aims to enable blockchain, cryptocurrency technology and innovation. Traditional securities services are opening up to Hong Kong’s large institutional investor base accustomed to operating under Hong Kong’s free hand. The Fusang Investment Office, licensed by the Hong Kong SFC, is now providing cryptocurrency custodial and audit services to institutional investors.

These Asian regimes are acting under the belief that, in the longer term, more regulatory oversight will bring more price stability to the volatile coin.

A regulatory bargaining chip

As the prospering Asian markets are demonstrating, regulation is no longer a Faustian bargain for the maturing cryptocurrency markets. If the cryptocurrency markets want to grow, they may have no choice but to comply, or risk leaving BlackRock and other institutional investors on the sidelines.

The enthusiasm over the prospect of Bitcoin ETFs is understandable. Basic indexed ETFs will open the floodgates to retail investors. These ETFs will replicate an index of cryptocurrencies (and may include fiat, gold, and other assets), allowing individual investors to reduce risk through a diversified portfolio, which would otherwise be too costly and complex to assemble.

In the institutional market, ETFs are becoming an indispensable liquidity and hedging risk management tool, representing about 20% of institutional assets. The availability of crypto ETFs to improve liquidity, rebalance portfolios, and create and hedge exposures to cryptocurrencies will be a driver of institutional adoption.

 

About the author

Mary Ann Callahan is an expert on Bitcoin-related topics and a journalist at the cryptocurrency exchange Cex.io. She works on articles related to blockchain security, Bitcoin purchase guides or Bitcoin regulations in different countries. Previous to this she was social media marketing manager for Boston Globe Media from 2012 to 2015.