Can Regulations Save Cryptocurrency Against Future Market Dips?

In the wake of the recent market downturn, some have called for better regulation of the crypto sector.

Can Regulations Save Cryptocurrency Against Future Market Dips?
  • As crypto market conditions worsen, the call for more robust and stricter regulations has continued to dominate. 
  • The Terra-Luna debacle, the FTX collapse, and the string of hacks ravaging the DeFi space all contribute to the current market situation.
  • Institutional investors could withstand greater crypto investments with the proper regulation and transparency. 
  • By providing well-targeted guidance, regulators could reduce speculation among crypto assets. 
  • Arguably, proper regulation will protect the sector from future dips.

Regulation has led to questions about whether it will prevent a repeat of the current market dip ravaging cryptocurrencies, particularly among actors in the crypto industry. 

Following the worsening crypto market conditions, the call for stricter and more robust regulations has continued to dominate the conversation. 

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Meanwhile, many factors have, over time, been identified as architects of the recent heavy dip. One of those factors, according to reports, is the rising exploitation of crypto projects. In current data by Chainanlysis, hackers stole more than $ 3 billion in 2022. 

Also, the crash of the Terra ecosystem and the liquidity issues of exchanges like FTX aided the prevailing market dip.

Is Preventing Future Market Dip Possible with Better Regulations?

A closer look at most countries that have designed a comprehensive regulatory framework for the industry will unveil how the regulations have prioritized investors’ security. These regulations strongly frown on using virtual assets to launder funds and finance terrorism. 

Nevertheless, here are a few areas that regulations can positively affect:

Institutions can Benefit from Regulations

Institutions play a significant role in the market, and if they do not feel secure, they will continue to move assets out of the market, causing dips. Institutional investors need transparency to make informed decisions. 

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Each investment must have a risk profile for institutions because of its risk-management nature. Risk profiles like these can only be built for transparent assets, which cryptocurrencies are not.

For example, the lack of transparency for the algorithmic stablecoin TerraUSD (UST) caused massive price drops for UST, its sister coin LUNA, and BTC prices. 

Having this level of uncertainty is not sustainable for a large financial institution. In the face of underlying fiscal problems, financial firms may avoid speculating on assets that might lose them enormous amounts of capital.

Nevertheless, institutional investors could withstand greater crypto investments and stabilize asset prices with the right regulation and transparency.

Regulations Could Reduce Speculation

Regulators could reduce speculation among crypto assets if they provide well-targeted guidance. In a highly speculative, volatile crypto market, less speculation can lead to higher investor confidence, which might attract more long-term investors.

A massive inflow of capital could stabilize regulated crypto prices and attract retail investors who aren’t yet familiar with the asset class. In turn, this would lead to a further increase in value and stability.

Meanwhile, most cryptocurrency enthusiasts perceive regulation as a strategy by the government and related institutions to curtail the industry’s growth. Despite this, a healthy regulatory environment can help project the industry positively, aiding its prosperity.

While regulation may not be the definite solution, it’ll go a long way to prevent or manage a price downturn. Supporting these claims is a reference to how the collapse of firms like Voyager, Celsius, Luna Terra, and FTX has prolonged the current bear market. Likewise, proper regulation of the industry could have prevented the crisis that led to the collapse of the companies mentioned above.

In this regard, it’s arguable that proper regulation will brace the sector against future dips. It might not stop totally due to other factors outside regulators’ control, like hacks, panic sales, fierce competition, and other micro and macro factors that can trigger a general downturn in the industry. 

Nonetheless, investors can always rely on the assurance of having a shield protecting them against situations that can illicitly claim their funds.

On the Flipside

  • Due to the lack of a single federal authority, Bitcoin and cryptocurrencies are complicated to regulate in the U.S. As a commodity, Bitcoin is regulated by the Commodity Futures Trading Commission (CFTC), as a property by the IRS, and as an exchange-traded fund by the Securities and Exchange Commission (SEC).

Why You Should Care

Crypto community members can benefit from regulation in the long run. The International Monetary Fund cites that a global regulatory framework will help regulate markets, provide consumer confidence, lay out what is permissible, and allow useful innovation.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Soumen Datta

Soumen has been a dedicated researcher and writer in the field of cryptocurrencies for the last few years. Even though Indian crypto regulations are still unclear, he believes that India will continue to innovate in the years to come. He loves to play his guitar and sing along in his spare time. He holds bags mostly in BTC, ETH, BNB, MATIC, ADA.