What happened
The value of cryptocurrencies dropped rapidly on Thursday as investors try to decipher what kind of regulation is coming to the industry in the U.S. The White House appears ready to push for regulation on the cryptocurrency industry and that uncertainty alone is spooking investors.
As of 2 p.m. ET, Bitcoin (CRYPTO:BTC) had dropped 6.3% in the last 24 hours, Ethereum (CRYPTO:ETH) was down 6.2%, and Dogecoin (CRYPTO:DOGE) had fallen 5%. The drop has been pretty steady over the last day and doesn’t appear to be stopping at the moment.
Image source: Getty Images.
So what
Current reports are that President Biden will issue an executive order next week asking for a variety of agencies to study cryptocurrencies and other digital assets. The agencies include the Departments of Treasury, State, Justice, and Homeland Security, with smaller agencies also asked to do technical reports.
One concern is the risk to financial stability from cryptocurrencies, which have traditionally been much more volatile than currencies or even the stock market. Understanding those risks will be a part of the study. The technical aspects could also be important, which could lead to regulations intended to safeguard people’s digital assets. Given the fraud and hacking that’s taken place in cryptocurrencies over the last year, this type of regulation may be welcomed by the industry.
We have seen big banks, small credit unions, venture capital firms, and publicly traded companies all lobby for regulation from Washington, D.C. to at least set the playing field for the industry. So an executive order like this isn’t surprising, but it’s a risk that some investors may not be willing to take right now. In any market, uncertainty is seen as a bad thing, causing selling to take place.
It’s also worth noting that the stock market overall is down today and cryptocurrencies typically fall when the market is down. So that move could be part of the reason Bitcoin, Ethereum, and Dogecoin are down today.
Now what
Long term, it’s going to be a positive thing for cryptocurrencies and the crypto economy for regulation to be written. But it’s not entirely clear if the current Congress or administration is friendly to crypto or not.
Companies and investors have been trying to get Congress and regulators to write favorable rules for years, but they’ve been fighting an uphill battle so far. Now that this is a multi-trillion dollar market it seems that political leaders are starting to take it more seriously.
While I think that long term it’s good that crypto will get a regulatory framework, I expect there to be ups and downs in the process. Markets don’t like regulation or uncertainty, so while this expected executive order is probably a good thing for cryptocurrencies long term, the short-term reaction may still be negative.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
