Exploring the Impact of Herd Mentality on Regulatory Decisions in Crypto
In a groundbreaking move in January 2024, the U.S. Securities and Exchange Commission (SEC) approved the first-ever spot Bitcoin (BTC) exchange-traded funds (ETFs). This decision set off a chain reaction globally, with other countries and regions swiftly following suit.
Taking a cue from the U.S., Hong Kong regulators sanctioned the launch of spot BTC and Ethereum (ETH) ETFs in April 2024. Currently, the European Union (EU) is contemplating a similar move, with the European Securities and Markets Authority (ESMA) seeking expert opinions on incorporating crypto into the investment product market.
The ESMA’s investigation includes evaluating whether Undertakings for Collective Investment in Transferable Securities (UCITS) could embrace crypto assets. These investment funds, valued at a whopping 12 trillion euros ($12.95 trillion), are already diversified across various asset classes, and crypto could be the next addition.
Should UCITS funds receive approval, they could emerge as one of the largest mainstream funds with crypto exposure, albeit in a diversified manner. This shift underscores a herd mentality among regulators, with jurisdictions like Hong Kong and the EU embracing crypto shortly after the U.S.’s approval.
What does this trend reveal about regulators worldwide, and what might it signify for the crypto market this year? Could it spur other countries to follow suit? Let’s delve into it.
Is the Crypto Herd Mentality at Play?
Herd mentality bias, a psychological phenomenon where individuals justify their actions based on the behavior of a larger group, is at the core of this regulatory shift. This behavior often leads to market bubbles or panics as individuals buy or sell assets simply because others are doing the same.
The psychology of herd mentality in trading implies that individuals may follow the crowd due to a sense of security or fear of missing out (FOMO). The International Monetary Fund (IMF) identifies three key reasons for traders succumbing to herd instincts, including a belief that others possess valuable information, incentives from compensation schemes, and an innate preference for conformity.
One of the earliest instances of herd mentality in finance is the Dutch tulip mania of the 17th century, where speculation and herd behavior drove tulip bulb prices to extraordinary levels before the bubble burst. Similarly, the dotcom bubble of the late 1990s and early 2000s saw investors flocking to internet-related technology stocks, resulting in a burst that caused many companies to go bankrupt.
The U.S. currently ranks as the third-largest crypto market globally based on the total number of users, with around 52 million users. This significant user base, coupled with approximately 45% of users holding $5000 or more in crypto, underscores the U.S.’s impact on the global crypto trade and commerce market.
As a result, regulatory decisions in the U.S. carry considerable weight and often influence other jurisdictions to follow suit. It is likely that regions like Hong Kong and the EU are mirroring the U.S.’s approach, possibly due to the belief that regulated crypto investments are the future of finance and FOMO.
However, this alignment could also lead to regulatory arbitrage and competition among countries vying to attract crypto businesses and investors.
ECB vs ESMA: Rivalry in the Making?
In February 2024, the European Central Bank (ECB) expressed strong skepticism towards crypto assets, particularly Bitcoin, echoing their stance from November 2022. They highlighted Bitcoin’s limitations in legitimate payments and environmental concerns related to its mining process.
In contrast, the ESMA has shown a more receptive stance towards crypto assets. This disparity raises questions about the coordination and coherence of regulatory efforts within the EU, leaving several issues unresolved.
ESMA’s consideration of adding crypto assets to UCITS carries several implications for the crypto market, including increased legitimacy, market growth, and regulatory harmonization.
What Do Experts Think?
Crypto.News interviewed Edul Patel, CEO & Co-founder of Mudrex, and Rajagopal Menon, Vice President of WazirX, to gain insights into this phenomenon.
Both Patel and Menon acknowledged the trend of countries following the U.S.’s lead in regulatory decisions. Patel emphasized the U.S.’s influence as the largest financial power, highlighting the SEC’s approval of spot BTC ETFs as a catalyst for similar products globally.
Menon echoed Patel’s sentiments, noting that U.S. policy approvals often lead to mainstream adoption. Regarding the implications of these trends for the crypto market, Patel suggested that spot BTC ETF approval could drive increased crypto adoption as mainstream investment options.
Menon echoed Patel’s remarks, indicating that ETF approvals could boost market participation and growth in the long run. Both experts identified regions like APAC, MEA, Australia, and the UK as potential candidates to follow the trend of approving similar products.
What to Expect Next?
Following the approval of spot BTC ETFs in the U.S. and Hong Kong, a global trend of countries considering similar products is expected. Look for announcements from regions like APAC, MEA, Australia, and the UK.
As countries vie to attract crypto businesses, regulatory competition may arise, presenting both challenges and opportunities. These developments signify that crypto has made significant strides and still has a promising future ahead.