From Tulip Mania to crypto ETFs: a journey through herd mentality

In summary, the European Central Bank (ECB) has expressed skepticism towards crypto assets while the ESMA has taken a more open approach, raising questions about regulatory coordination within the EU. The potential inclusion of crypto assets in UCITS could increase their legitimacy, drive market growth, and lead to greater regulatory harmonization. Experts suggest that countries may follow the lead of the U.S., with Australia and regions in APAC and MEA being potential candidates for approving similar products. The approval of Ethereum spot ETFs is also a possibility, with Hong Kong and the U.S. SEC currently reviewing applications. Overall, expect a global trend of countries considering crypto ETFs, leading to both challenges and opportunities as regulatory competition arises.

The concept of herd mentality refers to the psychological phenomenon where individuals follow the actions of a crowd without thinking independently. In the context of crypto regulations, this means that regulators may feel pressure to act in a certain way based on the actions of their peers or the prevailing public sentiment. For instance, if other countries have implemented strict regulations on cryptocurrencies, a regulator may be inclined to do the same out of fear of being left behind or facing criticism for not taking a similar stance.

In January 2024, the U.S. Securities and Exchange Commission (SEC) made history by granting approval for the first Bitcoin (BTC) exchange-traded funds (ETFs). This groundbreaking decision ignited a chain reaction, prompting other countries and regions to consider similar offerings.

The EU is considering the U.S.’s example and pondering over allowing the sale of Bitcoin (BTC) and Ethereum (ETH) exchange-traded funds (ETFs) in European markets. ESMA, the European regulatory body for securities markets, is currently gathering input from industry experts on this potential development.

The European Securities and Markets Authority (ESMA) is considering if it’s feasible for Undertakings for Collective Investment in Transferable Securities (UCITS) to incorporate crypto assets within their investment portfolios.

Twelve trillion euros ($12.95 trillion) worth of investment funds currently hold diverse investments in assets like structured loans, commodities, and emission allowances. Adding crypto to this mix is a potential next step.

With approval, UCITS funds may gain significant popularity and become among the largest conventional investment vehicles holding cryptocurrencies, offering diversification in their portfolios.

As an analyst, I’ve observed that regulatory bodies around the world seem to be following each other’s lead in their approach towards cryptocurrencies. For instance, both Hong Kong and the European Union have recently shown support for crypto assets, closely following the United States’ approval.

As a seasoned analyst, I’d be happy to provide some insights based on the information at hand. This news of multiple regulatory bodies taking a firm stance against cryptocurrencies raises several intriguing questions.

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Is the crypto herd mentality at play?

The herd mentality bias refers to an individual’s tendency to follow the crowd and justify their actions based on the collective behavior of a larger group.

People may exhibit this pattern by purchasing or disposing off assets based on others’ actions, which can result in inflated markets or sudden sell-offs.

In the realm of trading psychology, the phenomenon of herd behavior implies that people might be swayed to join a popular trend due to feelings of security or the apprehension of being left behind.

According to the International Monetary Fund (IMF), there are three primary causes leading traders and investors to follow the crowd behavior: a conviction that their peers possess exclusive data, rewards offered through remuneration plans, and a natural inclination towards adhering to group norms.

In the 17th century, an intriguing episode of mass hysteria in finance occurred – the Dutch tulip mania. Fuelled by rampant speculation and imitative behavior, the value of tulip bulbs skyrocketed to unprecedented heights during this period. However, this economic bubble ultimately burst, causing a drastic plummet in prices.

More recently, the late 1990s and early 2000s saw the dotcom bubble as a clear manifestation of herd behavior. A massive influx of investors poured into tech stocks related to the internet, causing prices to skyrocket unrealistically. Unfortunately, when this bubble burst, numerous internet companies succumbed to bankruptcy.

As a crypto investor, I’m always keeping an eye on the global market trends. Currently, the United States holds the third-largest position in the crypto world with around 52 million users. This substantial user base is significant because nearly half of these users possess over $5000 worth of cryptocurrencies. Consequently, the importance of the U.S. in the global crypto trade and commerce market cannot be overlooked.

As a crypto investor, I can’t help but acknowledge the significant impact of regulatory decisions in the United States. These decisions often set the tone for other jurisdictions around the world, with regions like Hong Kong and the EU keeping a close eye on the U.S.’s moves. The belief that regulated crypto investments represent the future of finance, coupled with a fear of missing out (FOMO), may be driving this trend.

As a researcher studying the potential implications of cryptocurrency regulations, I cannot overlook the possibility that varying degrees of alignment among different jurisdictions might give rise to regulatory arbitrage. In simpler terms, this means that countries with more lenient or favorable crypto regulations could potentially attract a higher concentration of businesses and investors seeking to capitalize on these advantages, resulting in increased competition among nations in this domain.

ECB vs ESMA: rivalry in making?

Back in February 2024, the European Central Bank (ECB) displayed notable reluctance and raised concerns about crypto assets, specifically Bitcoin.

Their current doubt reflects their previous stance in November 2022, expressing concerns over Bitcoin’s limitations for valid transactions and the environmental implications of its mining procedure.

The European Central Bank’s stance is unmistakable: Bitcoin has failed to live up to its expectations as a universal, decentralized digital currency or a financially sound investment.

As an analyst, I’ve noticed a notable difference in regulatory approaches between the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) when it comes to crypto assets. The ESMA has adopted a more lenient stance, whereas the ECB has expressed caution. This disparity begs the question: what could be the reasons behind this divergence in perspectives?

The discrepancy between the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA) brings up worries regarding the unity and clarity of regulatory actions within the EU, leaving several questions unexplored.

Simultaneously, the European Securities and Markets Authority (ESMA) pondering over including crypto assets within the scope of UCITS brings about various consequences for the cryptocurrency market.

  • Increased legitimacy: Inclusion in UCITS would grant crypto assets a higher level of legitimacy and recognition in mainstream investment circles.
  • Market growth: Mainstream acceptance could drive increased liquidity and market expansion. More investors, both institutional and retail, might enter the market, boosting demand for crypto investments.
  • Regulatory harmonization: Aligning regulatory approaches across jurisdictions could lead to greater harmony and reduced uncertainty for market participants.

What do experts think?

I had the opportunity to engage in enlightening conversations with Edul Patel, the CEO and co-founder of Mudrex, and Rajagopal Menon, the Vice President of WazirX. Through Crypto.News, I was privy to their valuable perspectives on various topics.

Herd mentality among regulators

Patel and Menon conceded that many nations have been mirroring the United States’ regulatory approaches.

Patel highlighted the United States’ role as the dominant player and primary influencer in global financial markets. Notably, he mentioned that the Securities and Exchange Commission (SEC) giving its green light to Bitcoin spot Exchange-Traded Funds (ETFs) served as a significant impetus for other nations to explore similar initiatives.

In the realm of financial markets, the United States has held the top position for a long time, mainly because it is an advanced country. The genesis and widespread acceptance of cryptocurrency occurred in the U.S. before its adoption elsewhere. Following the SEC’s endorsement and the growing popularity of these ETFs, Hong Kong has given the green light to both Bitcoin and Ethereum spot ETFs. This decision has bolstered confidence, prompting more countries to contemplate similar steps in the upcoming months.

Menon expressed agreement with the idea. He pointed out that once the U.S. endorses policies, they tend to become widely accepted.

“The crypto community in the United States boasts a powerful advocacy group, paving the way for regulatory favor. Often, policies gain widespread acceptance following U.S. approval due to the country’s economic might and the influence of the dollar and its index on asset prices.”

Implications for the crypto market

In relation to thecrypto market, Patel pointed out that the acceptance of Bitcoin ETFs for trading in their spot market form could result in a surge in crypto adoption, making it more accessible as an investment choice for the mainstream population.

As a researcher studying the cryptocurrency market, I’ve noticed a palpable sense of fear of missing out (FOMO) among investors following the recent price surge after a prolonged two-year bearish cycle. However, looking beyond the short term, I believe that the launch of Bitcoin spot Exchange Traded Funds (ETFs) and the increasing influx of institutional and retail investors into the market are strong indicators of a positive long-term outlook. These developments are expected to significantly boost adoption and growth in the cryptocurrency space.

Menon agreed with Patel’s points. He proposed that endorsing Exchange-Traded Funds (ETFs) might result in more market involvement and significant expansion over the long haul.

“Bitcoin’s effect after halving is unique due to a wider array of involved parties than ever before. Retail investors’ fervor has sparked fear of missing out among institutional investors, causing them to aggressively purchase ETFs to expand their holdings.”

Countries likely to follow suit

As a crypto investor, I’ve noticed that different regions have been suggested by experts as promising contenders for following the trend of approving similar products in the cryptocurrency space. According to Patel, these areas are particularly noteworthy.

Australia is set to debut Bitcoin spot Exchange-Traded Funds (ETFs) by year-end. Following suit, the London Stock Exchange has unveiled intentions to entertain applications for Bitcoin and Ethereum Exchange-Traded Notes (ETNs).

Menon noted that numerous cryptocurrency-favorable measures have been implemented by countries in the APAC (Asia-Pacific) and MEA (Middle East and Africa) regions, with an intent to solidify their positions as significant crypto hubs.

In the APAC and MEA regions, nations may introduce offerings that enable traditional retail investors and institutional investors to invest in cryptocurrencies via products such as Exchange-Traded Funds (ETFs). These countries have taken numerous crypto-friendly actions and are committed to establishing a thriving crypto ecosystem.

Potential impact of an ETH ETF

With reference to the prospect of an Ethereum spot Exchange-Traded Fund (ETF) being granted approval, Patel pointed out Hong Kong’s previous approval of such ETFs for Ethereum and the ongoing evaluation by the U.S. Securities and Exchange Commission (SEC) as significant factors that could influence the situation.

As a researcher studying the global trends in exchange-traded funds (ETFs), I’ve observed that Hong Kong has given its approval for spot Ethereum ETFs, following the U.S.’s Securities and Exchange Commission (SEC) reviewing a similar product. Consequently, it seems plausible that other countries will soon join this trend.

Meanwhile, Menon added:

Ethereum Exchange-Traded Funds (ETFs) are currently in a speculative phase. Notably, Grayscale has withdrawn its application for an Ethereum Futures ETF due to the uncertainty surrounding regulatory approval. However, if other economies were to take the initiative on this matter, it could potentially be Singapore or Japan, given their forward-thinking and investor-friendly attitudes towards cryptocurrency adoption.

What to expect next?

As a seasoned crypto investor, I’m thrilled about the recent approval of spot Bitcoin ETFs in the United States and Hong Kong. This marks a significant milestone in the mainstream adoption of digital assets. Keeping this in mind, we can anticipate a global wave of countries exploring similar products. Stay tuned for updates from regions such as APAC and MEA, Australia, and the UK, where regulatory decisions could be announced soon.

As countries strive to draw crypto businesses, competition in regulations could ensue, resulting in hurdles as well as benefits. In essence, the advancements signify that cryptocurrency has made significant progress but still holds much potential for growth.

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2024-05-15 12:09