Despite volatile market fluctuations and reports of major security hacks, cryptocurrency remains the most attractive growth market on the planet – I think it’s important to lay that on the table from the outset.
However, what not all may agree with is the idea that regulation will be a positive for the crypto market – rather than a hindrance, as regulation is generally seen as a function of reactivity to a market’s risk and growth.
Many an early investor viewthe current lack of regulation as an incentive to get into the market. There is even a view that regulation will end the party prematurely, as lawyers take their slice of the pie and add tedium to the lithe process of market entry and exit that investors have grown to value.
Conversely, my view is that regulation is a natural aspect of maturity of the market, paving the way for broader adoption by increasing its legitimacy within the financial services industry.
I have watched early adopters of crypto make huge profits whilst erstwhile seasoned investors were locked out of the market due to limited access, high barriers to entry and dependence on regulatory guidance.
We saw that in its stratospheric rise of late 2017 and the eventual price correction which has masked the fact that, the industry is starting to live up to that potential behind the scenes. To administer a dose of reality to the doomsday naysayers, it is worth remembering that the current market sits no lower than where it sat in November.
In that sense, the sounding of the death knoll for Bitcoin and its counterparts is just media ‘noise’ in my view. Crypto markets are extremely volatile but that is a natural consequence of its small pool which makes it susceptible to conventionally slight market movements and global sentiment. In addition, fuelled by such rapid early growth, timescales in crypto terms are skewed disproportionately by expectation.
While recent market sentiment may reflect a downward trend, as a brokerage we have the luxury of visibility on the increased demand for large volume OTC trades, driven by institutional investors and high net-worth individuals.
The key to greater returns and market stability is institutional investment, and without regulation that isn’t going to happen any time soon. Institutional investors, rightly, operate with greater prudence than the average retail investor, and so we’re still seeing a healthy degree of scepticism. After all, there is a still a lot of ‘grey’ in our industry.
On a positive note though, my takeaway from the recent Stockbrokers and Financial Advisor’s Association Conference, was that the appetite is very much there. The fund managers I’ve spoken to certainly see the potential, and they’d be foolish not to.At an approximately $300 billion market capital, the crypto market is dwarfed by the $63 trillion plus on the major stock exchanges. The potential for growth then, is immense.
But between potential and reality falls the shadow, as the poet T.S. Eliot prophetically mused.
Regulation will allow larger institutions to deploy capital into the space with a degree of comfort.
A number of factors which are interdependent with regulation will also benefit the retail investor. These include the development of a regulatory framework, robustness of custodial solutions, and of course, insurance.
From a global perspective, we are seeing smaller countries such as Malta, with its announcement of a holistic regulation approach, forge ahead in the race to legitimacy and attracting major players such as Binance, the world’s largest Crypto exchange to its sunny beaches and even sunnier regulatory disposition. Larger, and resultantly more cumbersome, juggernauts such as the USA, are being left behind due to the sheer weight of incumbent inertia and vested interest.
Australia launched formal AUSTRAC regulation of Digital Currency Exchanges on April 3rd, the first step towards amalgamation and a much needed one if it is to keep up with the economies of the future.
The current focus seems to centre on regulation and the role of governance to determine the macro-view of this emerging challenge to the traditional financial marketplace. However, on a more practical level, the role of tight security and robust custodial solutions in cementing trust in this technology is paramount.
There is no substitute for ensuring one’s assets are stored safely and regulation or otherwise, this remains one of the big knowledge gaps for investors entering the market that needs to be bridged.
Knowledge then, as always, is the key to safe, intelligent and mature investment in a young and exciting but still tempestuous industry whether you are an individual, institution or regulator.
Dr Prash P. founded Caleb & Brown in 2016, after his own initial attempts at entering the crypto market led to frustration with the lack of security and knowledge in the market place.