Why Government Regulation Will Fail

The crypto markets have been buzzing lately with as much price volatility as ever.  The attention, as usual, often appears to be on how many dollars have been lost or what ginormous percentage loss has taken place.  There is all this talk about broken support levels and the urgent need of a price reversal.

Not to dismiss the importance of keeping everyone informed on the latest action, what about the underlying cause of investors running for the sidelines.  On the technical side one thing is certain.  The still pathetically slow transaction speeds of both bitcoin and ether magnify price spikes and corrections.

That is what happens in illiquid markets.  Over time this will change but in the short run it is something that is part of daily life.  This alone is what makes it so difficult to apply classical Dow Theory based technical analysis to crypto.

Let’s Dig Into The Causes

When we look at cryptocurrencies in general, starting with bitcoin, one of the big questions is the future role of government will play.  It is not so much a big question as hundreds of little questions.

The most relevant question in the past few months is the role of government in controlling cryptocurrency exchanges.  Back in September it was the Chinese closing local exchanges. Now it is the South Korean proposal to enact legislation that could have a similar effect.

From December peak levels, bitcoin has fallen more the 40%. At its low ether was down as much as 38%.  Neither price movement can be attributed to technicalities like profit taking.  It was the perception the governments in two of the big crypto trading countries hold some sort of absolute power.  In reality, this is a false perception and here are some of examples of their powerlessness.

BTCC Shows Crypto Power

BTCC is China and the world’s first Bitcoin exchange going back to its founding in 2011. At one point last year China was the biggest source of demand for Bitcoin by some measures accounting for 40% of the global action.  Then China slammed down the hammer by closing local exchanges threatening BTCC very existence.

Survival – Revival

The story of BTCC is like a slap in the face to the Chinese government and a good example of their lack of power.  Just the other day, BTCC announced they had been acquired by a Singapore investment fund.  Very few terms were announced so there is more to be revealed but some things are obvious.

I am guessing that if a sophisticated Singapore investor is putting real money into BTCC they see a bright future. BTCC has since relocated to Hong Kong and re-registered in the UK.

BTCC already has the tools to become a global exchange.  For example its Mobi Bitcoin wallet supports over 15 languages and more than 100 cryptocurrencies.  Now with enhanced financial support, they are able outflank the powerful Chinese government.

The Korean Contradiction

Investors reading the news this month from South Korea learned about a legislative proposal to restrict exchanges domiciled in the country.  Judging from the negative price action, it would have been easy to suspect the government was banning ownership of cryptocurrencies.  That was never the case.

In reality, South Korean exchanges were setting prices that any reasonable observer would consider egregious.  Regulating South Korean exchanges could help level the playing field for small investors and open up the crypto market to new investors. But, judging from the price action this month, you would have to expect government restrictions on ownership. That is not going to happen and here is why.

Korean Pension Funds Invested in Crypto Exchanges

Local news in Seoul are talking about the giant South Korean National Pension Fund holding investments in as many as four local cryptocurrency exchanges.  At just a few million dollars, it amounts to less than 1% of total SKNPF assets.

Nevertheless, this amounts to a political embarrassment to any effort that would potentially diminish the value of the four exchanges in the SKNPF portfolio.  The South Korean Pension Fund is no slouch ranking as one of the largest in the world.  So their decisions could also serve as an example elsewhere in the world.

Lots of Sound And Fury, Signifying Nothing

Emerging markets like cryptocurrencies are inherently volatile and subject to a heavy dose of emotion.  The past two months have been good examples of how investors can read the headlines and react.  It is important to keep the true cost of trading on trading on headlines can be.  Under the new tax law long term investment is rewarded.  Short term profits can no longer be deferred by a swap into similar assets.  Five years from now will anyone remember the fears from Chinese or South Korea?

Featured image courtesy of Shutterstock. 

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