How Will Regulation Affect Cryptocurrency Prices?

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By Jacob Maslow

  • Governmental regulation is inevitable and will only serve to legitimize cryptocurrencies
  • Cryptocurrencies offer an efficient, secure way to make transactions
  • The blockchain has myriad potential applications in business and society
  • Bitcoin has been around for a decade and has withstood intense scrutiny

Cryptocurrency and the blockchain seem like the Wild, Wild West. This is the reason many people love, and others avoid crypto assets. However, given the extreme volatility of digital currencies, the questionable activities of crypto platforms, and the proliferation of crypto frauds, government regulations are being proposed and passed around the world. 

In March 2022, US President Joe Biden issued an executive order for a “whole of government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technologies.” At the same time, Europe is passing cryptocurrency regulation, which will bring digital assets under the European Securities Markets Authority (ESMA). 

These government proposals aren’t intended to treat cryptocurrencies as a threat but as a new financial reality that should be dealt with. Ten countries have created their own central bank-issued crypto coin. 

Although crypto entrepreneurs may be annoyed at the concept of government oversight, the extreme rises and falls of crypto prices and the many frauds on the blockchain have made some rules and regulations necessary to protect consumers. 

Reducing the Volatility of Crypto Prices

Anyone following crypto prices knows they tend to turn on a dime. It doesn’t take much to bring a crypto asset’s perceived value to the stratosphere or to knock it to the basement. Even a tweet from a significant person can dramatically shift crypto prices. 

This makes crypto trading exciting but dangerous. It can be almost impossible to predict a market as temperamental as crypto. That isn’t to say that crypto traders haven’t found some patterns that can be profitable, but the market is hard to game, given its volatility.

Regulations will remove volatility because crypto platforms and ICOs will be held accountable for crypto trading activities. ICOs and stablecoin will need to verify the value, and a lot of the uncertainty that makes crypto assets so volatile will be removed. 

Also, regulations designed to eliminate manipulative trading practices will stabilize the crypto market. Stocks can be volatile, but there are rules against certain practices that can artificially move prices. Once these are passed to apply to crypto assets as well, crypto traders and users will find more stability in crypto assets. 


Modifying Risk

Crypto trading is not risk-averse. Many traders like speculative investments, but it can be argued that crypto risk is excessive, even for the bravest trader. 

As long as there are few reporting requirements, no need to verify the value behind these assets and few rules governing crypto trading, losses from crypto are likely to be disastrous for consumers. Risk is fine, but more transparency will make crypto markets speculative rather than ruinous. 

Verifying Stablecoin

One reason stablecoin got its name because it is considered more stable than many other crypto assets. That’s because it’s levered to commodities or fiat currency. With other types of crypto coins, there is no way of knowing how they are being valued. Stablecoins on the other hand, are levered to real assets, reassuring to many crypto users. 

However, European rules would go further and impose rules that would ensure and validate the stability of stablecoin. According to proposed regulation in Europe, stablecoins must show they are fully liquid, that customers can cash them out on demand, and must have reserves of the commodity or currency they are levered to. This should instill confidence in stablecoin and prove that they have real-world value. 

Kinder, Gentler Cryptocurrency Trading

As a result of regulations in the US, Europe, and other places, cryptocurrency trading may resemble speculative stocks in the amount of risk and volatility. Upward and downward swings bitcoin has made in the past two years–including losing 70% of its value in the winter of 2022—is enough to make anyone dizzy and any crypto trader worried.

What is ironic about the swings in bitcoin price is that bitcoin is among the most steady of cryptocurrencies. If crypto is the wave of the future of finance, it should provide some stability, or it will remain just another dodgy fad. Regulations should encourage greater use and trade of cryptocurrencies to foster digital assets confidence. 

Although some crypto traders who fancy themselves as mavericks may dislike the idea that digital assets will be regulated, the new rules may alleviate concerns and address many of the objections people have to cryptocurrency in its current form. 

Cryptocurrency prices may not move as rapidly once regulations are in place, so people may be unable to make thousands in one day based on blind luck. However, it also means that entire positions are unlikely to be wiped out in a single day. 

Government regulation should bring stability to crypto prices and make trading of digital assets more accessible to everyday investors and traders. 


What are the benefits of government regulations for cryptocurrency trading?

Government regulations can help stabilize crypto prices, protect investors from possible manipulation, and foster greater confidence in digital assets.

How will regulation ensure the stability of stablecoins?

Regulations in Europe require that stablecoins show they are fully liquid and have reserves of the commodity or currency they are levered to verify their value. This should instill more confidence in stablecoin and prove they have real-world value.

Will cryptocurrency become less volatile after regulations are put into place?

Although some fluctuations in price may still occur, it is unlikely that entire positions will be wiped out in a single day. Regulations should bring more stability to crypto prices and make trading of digital assets more accessible to everyday investors and traders.

What impact will government regulations have on crypto traders?

Crypto traders may have to adjust their strategies, as the rapid swings bitcoin has made in the past two years are unlikely to occur once regulations are implemented. However, this means they may be unable to make thousands in one day based on luck. Government regulation should create more stability which will protect investors from significant losses.

What role will regulation have in increasing public confidence in cryptocurrencies?

Regulations can help alleviate concerns and address many of the objections people have to cryptocurrencies. By providing greater protection to investors, government regulations can also help increase public confidence in digital assets.

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