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“I’m from the government and I’m here to help.”
Then-U.S. President Ronald Reagan called that phrase “the most terrifying words in the English language”.
Reagan wasn’t thinking of bitcoin, or cryptocurrencies.
But if he had been, he would have been wrong (about the terrifying part).
You see, regulation might be the very thing that saves cryptocurrencies from themselves. And regulation might open cryptos up to a much bigger universe of buyers.
Its own worst enemy
Part of the appeal of bitcoin, and of cryptocurrencies, is that they exist in an unregulated netherworld. But that’s also what’s holding them back.
When the J pattern appeared in Bitcoin in late 2015, Bitcoin soared 7,247% in the next 18 months. Today, the same J pattern flashed in a tiny crypto one crypto insider calls the “New Bitcoin”.
And – like Bitcoin in 2015 – this tiny crypto could soar hundreds of percent, if not more, in the coming months.
Invest in stocks… put money in a bank… buy an option… pretty much anything you do with money is regulated. Like it or not, regulatory busybodies are there.
Of course, the regulator cops can’t protect you from your own bad decisions, which are the biggest risk to your money. But they at least try to make sure that the institutions you trust to keep your money for you don’t break the rules.
But right now, regulators aren’t doing that with cryptocurrencies. And as a result, a lot of cryptocurrency investors have lost a lot of money.
The tone was set back in 2014, when bitcoin exchange Mt. Gox filed for bankruptcy. Mt. Gox, which at the time was handling up to 70 percent of all bitcoin volume, said that 750,000 customer-owned bitcoins (worth US$3 billion at today’s prices) had gone missing.
Mt. Gox was originally designed as an exchange of collectible cards. So looking back, it’s not surprising that it wasn’t the most solid and stable marketplace for bitcoin.
The credibility of cryptocurrency infrastructure – and products – has suffered since then. Many ICOs, during the brief explosion in coins late last year and early this year, were fraudulent. The Belgian government recently estimated there are over 200 fraudulent exchanges operating in Europe.
Another risk that regulators may attempt to tackle is that the slightly careless crypto investor can wipe himself out by mistyping a few digits. And there’s no customer service number to bail him out.
Bad hard forks
To make matters worse – and further invite regulatory scrutiny – cryptocurrencies do things like “hard forks”. That’s a split in a cryptocurrency that happens when its developers don’t agree on how to update the underlying software. As a result, the cryptocurrency splits into two.
I’m sure these forks are very important to the principled and stubborn people behind them, who want to be true to their vision of (say) Bitcoin Cash. That’s the most recent highly controversial fork.
But to the rest of us, it’s like a beach fight over whose sandcastle is bigger. The problem is that these squabbles cost crypto investors money. The fight over Bitcoin Cash has probably been a big reason for the price of bitcoin collapsing 42 percent over the past 11 days.
This fork also caused big problems at a Hong-Kong based crypto exchange called OKEx. The Financial Times explained last week…
“In the midst of the volatility, traders say OKEx changed the rules of the underlying settlement index, leading to trades suddenly being settled against entirely different indices.
‘A comparable scenario would be Chicago Mercantile Exchange announcing that the S&P 500 E-Mini Futures contracts will settle and deliver tomorrow, but against the Shanghai Composite index instead of the S&P 500, in the midst of trading,’ according to Amber AI, a cryptocurrency hedge fund. Amber estimates traders took up to $400m in losses.”
That’s just the sort of thing that will get regulators involved. After all, they’re from the government and they’re here to make things better. And the funny thing is, they just might.
These are the people who need regulation
We’ve been saying for a while that a big trigger for cryptocurrencies will be when institutional money – hedge funds, mutual funds, pension funds – finally get involved in the asset class.
That’s the day that there’s a real bitcoin ETF, as we discuss here. It’s when pension funds put money into cryptos. It’s when hedge funds open trading desks dedicated to crypto trading. It’s when brokerages start to cover cryptos like they analyse stocks.
But none of that is going to happen without real regulation. Institutional investors – who have serious fiduciary responsibilities – need compliance requirements, legal opinions and trading guidelines in place before they can touch cryptos.
The Chicago Mercantile Exchange (CME) solved part of the regulatory puzzle when it launched bitcoin futures in December 2017. That was a start. But there’s a long way to go.
Complicating matters is that cryptos don’t easily fall into any one legal jurisdiction. That requires a lot of trans-national cooperation, which would be groundbreaking.
Connecting the dots
Anytime an asset class collapses in price, regulators get a gleam in their eyes. “How can we protect investors and consumers?” they ask themselves. That’s the first part.
Then, as the asset class struggles to mature – cryptos right now are showing themselves to have the maturity of a five-year-old with no sleep on a sugar high– it further stirs regulators. Mt Gox loses money. Bitcoin Cash and others do a hard fork. OKEx makes stupid mistakes. And the regulators grumble, more loudly now, “Something must be done!”
(And let’s not forget. How often do regulators make the conscious and intentional decision to not regulate something? Bees buzz, wind blows and regulators regulate. It’s what they do.)
According to a Business Insider report, some of Silicon Valley’s top tech firms and venture capitalists invested US$18 million into a secretive burger restaurant.
Why are Silicon Valley billionaires suddenly backing fast-food restaurants?
Then come the big institutional investors. They have their own interests in mind – and they come at the regulation puzzle from a different angle. But they still want regulation – so that they can invest.
Putting it all together
Regulation will take away some of the fun from the cryptocurrency world. People who invest in cryptos partly to escape the system will move on to the next thing. Coins pumped by celebrities, athletes and rappers will no longer be a thing. A lot of cryptos might not make the regulatory cut. Lots of people will lose a lot of money.
But in this case, it will all be for the better. What cryptocurrencies need now is more regulation – not less. The uncoordinated cryptocurrency founders and programmers who create problems like the Bitcoin Cash fork need to spanked and sat in the corner. And the bad actors who want to rip people off need to be found and punished.
It’s underway. The U.S. Securities and Exchange Commission (SEC) is slowly cracking down on unregistered exchanges and securities. But it will take a while.
The end result will be a better and safer investment environment for everyone. And that’s when the real fun in cryptos should start.
Publisher, Stansberry Churchouse Research
P.S. Early investors into the right cryptocurrencies stand to make a fortune as regulation – and institutional investors – comes to this space. If you want to set yourself up for big gains in crpytos, Strategic Wealth Confidential is a great way to get started. You’ll learn the best cryptos to get started with today and exactly how to buy and sell. You’ll thank yourself later.