A study conducted by the Bank for International Settlements (BIS) found that cryptocurrency price variations are closely correlated with various regulatory actions taken by authorities reported in the news.
Cryptocurrency in the News – a Trigger for Price Variations
The authors of the report are Raphael Auer, Principal Economist, Monetary and Economic Department, and Stijn Claessens, Head of Financial Stability Policy and Deputy Head of Monetary and Economic Department at the BIS. They analyzed the historic variations of prices for the most popular cryptocurrencies – Bitcoin and Ethereum – in parallel with news reports on decisions and regulations made by state and federal authorities.
This empirical method led the researchers to formulate four key findings concerning the interdependency of crypto market news and the value of cryptocurrency:
1. Bans, Legal Battles and Restrictions – Most Significant News Events Impacting Crypto Prices
Not all types of news stories have the same impact on the value of cryptocurrencies. The market reacts most strongly to highly risk-related events such as information of bans, restrictions and legal disputes involving ICOs. This category of events includes ongoing ambiguity expressed by regulatory bodies with relation to cryptocurrencies.
To illustrate this type of impact, the study focused on two key news events earlier this year. The first is a rejection by the US Securities Exchange Commission of a proposal for creation of Bitcoin ETFs. The second represents an order issued by the Financial Services Agency in Japan to six cryptocurrency exchanges, urging them to improve their money laundering screening procedures. In both cases, Bitcoin prices took a dive immediately after the news stories came through.
2. Regulatory News on AML/CFT Measures Have a Noticeable Effect on Crypto Markets
These news stories concerning AML/CFT and cryptocurrency-related infrastructure regulations also have a noticeable impact on cryptocurrency prices.
One instance of this type of news stories concerns German Financial Supervisory Authority (BaFin) ordering a crypto exchange to stop brokerage operations. At the other end of the spectrum, a positive news story, such as the one reported by Reuters News, about how regulators are willing to let the crypto market continue to develop, as long as they can keep fraud in check, induced an increase in cryptocurrency prices.
According to the report:
“News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains.”
3. Non-Specific General Warnings Have an Insignificant Impact
General purpose news stories dealing with the dangers and risks of investing in cryptocurrency have a very low impact on the cryptocurrency prices. This category of news includes opinion articles and other non-specific stories which talk of pros and cons of cryptocurrency.
In the same category of low impact (though positive) news stories fall announcements made by various central banks and regulatory bodies to launch their own cryptocurrencies.
4. Despite the Borderless Nature of Cryptocurrencies, There Is a Price Difference Across Countries
The final finding of the BIS research shows that cryptocurrency prices vary from country to country, despite their cross-border and entity-free nature. For example, the Bitcoin price in Korea frequently exceeds that in the US, sometimes by over 50%.
“Part of our interpretation is that cryptocurrencies rely on regulated institutions to convert regular currency into cryptocurrencies,” explain the report authors. They go on to conclude that the use of crypto wallets, which are usually regulated, and other similar factors “create market segmentation and fragmentation”.