A new report has found that news stories about cryptocurrency regulation affect the price of Bitcoin and other cryptos. This might seem obvious to cryptocurrency watchers. However, what’s interesting is what the report found about the different ways that such news impacts prices. Notably, news stories about limiting or banning cryptocurrencies tend to have the effect of lowering prices. In contrast, news stories about creating new cryptocurrency regulations tend to cause prices to rise.
This means that even if the perpetual talk about cryptocurrency regulation is tedious, the correlations between news stories and coin prices means it is still relevant for investors.
Regulation Not Always Bad News for Crypto Prices
The report determined that cryptocurrency markets react significantly to news about government regulatory actions. In particular, news stories about the following topics hurt prices and trade volumes:
- Bans on crypto trading or the application of securities law to cryptocurrencies
- News that cryptocurrencies will be treated differently than conventional fiat currencies
- News about needing to combat money laundering and terrorist financing
- Restricting the use of cryptocurrencies in regulated markets
Specifically, within 24 hours of these types of news stories, Bitcoin price declined over 3% on average.
However, it’s not all negative. The report also found that news about the creation of laws and regulations tailored explicitly to cryptocurrencies correlates to market gains. In the 24 hour period after this type of news, Bitcoin prices increased on average 1.5%.
Bitcoin Prices Fall After News of Restrictions and Bans
The report offers examples of news stories that have affected coin prices. For instance, Bitcoin’s price fell in reaction to two recent news stories. One about US Securities and Exchange Commission rejection of Bitcoin ETFs. The second, which resulted in a less severe fall in Bitcoin’s price, was about an improvement measure by Japan’s Financial Services Agency forcing exchanges to take extra measures to prevent money laundering.
Altcoin Prices Also Affected by Regulatory News
The report also looked at other cryptocurrencies and found similar patterns. Bitcoin Cash, Litecoin, and Zcash prices react to news about regulation similarly to Bitcoin, but to a lesser extent. Monero reacts more strongly than Bitcoin. Ripple’s XRP token also reacted less, which the study determined may reflect the fact Ripple centrally controls its network, making XRP distinct from other, permissionless, cryptocurrencies.
More Than Prices Affected
The report found that news events affected not only the price of a cryptocurrency but also the volume of transactions, the number of wallet addresses, and even cryptocurrency mining activity. For instance, mining profitability “declines strongly whenever regulation becomes tighter.” Since profitability affects the exit and entry of miners, the report noted that “this response ultimately can also affect the security of the various cryptocurrencies.”
Regulation Not Necessarily Bad News for Cryptocurrencies
Based on the positive relationship between prices and news about useful regulatory frameworks, the report concluded that regulation is not necessarily bad news for cryptocurrencies. The market reacts positively to news of appropriate regulatory frameworks. The price responses show the sector has a preference for “a defined legal status, albeit a light regulatory regime.” This means regulators can go ahead and create laws without impacting the market negatively.
However, it is crucial that regulations are tailored to the cryptocurrency sector. For instance, to create an appropriate framework the report suggests regulators need to ensure there is a consistent approach taken globally. Different countries can’t take different types of regulatory action unilaterally. Instead, they must act together. Boundaries between national regulatory bodies may even need to be redefined to accommodate the international nature of cryptocurrency markets.
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