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NYDIG Research: Quantitative Analysis of the Impact of Regulatory Policies on the Market (China, US, Europe)


Regulatory clarity is often cited as an obstacle to widespread institutional adoption of crypto asset classifications. After all, investors are not used to questioning whether their investments are regulated or not, or questioning possible future changes. While we believe that Bitcoin’s regulation is well received in the US, this is not the case for other digital assets and the services they provide. We have long believed that, as long as regulatory clarity is not a threat, the greater the regulatory clarity, the more support it will receive, which in turn will have a positive effect on prices. In theory, once investors know the rules, they can safely abide by them, regardless of their content. We examine the effect of increased regulatory clarity on prices and find that this relationship holds true across geographies. In the case of China, as the country prohibits the mining and trading of digital assets, we found that regulation had a detrimental effect on prices. It is increasingly clear that much of the world, including the US, appears to be taking an approach we classify as "supportive but with reservations", an analysis that reinforces our belief that increased regulatory clarity will benefit prices . Considering that there is still a lot of room to improve regulatory clarity, the price of Bitcoin may therefore have a positive future.

Research methods

We examine historical events involving the regulation of digital assets in different countries. These events cover issues such as taxation, accounting, payments, mining, the legality of exchanges and other service providers, and even the legality of digital assets themselves. Over the next day, week, month, six months, and year, we track Bitcoin's subsequent price return. These returns are evaluated in absolute terms and relative to Bitcoin’s long-term average return. We aggregate and average returns across four regions: Americas, China, Asia (ex-China), and Europe.

Our statements include returns over a range of periods, but we believe returns over longer periods are greater. There are several reasons for this. First, while we map the exact timing of events, it's not always clear when the information occurred or was processed by the market. Second, immediate price reactions can sometimes mask longer-term price trends after the market digests the news. So looking at one-day returns (or even one-week returns) can be misleading about the true price impact. In addition to focusing on longer periods, we also focus on returns relative to long-term averages rather than absolute returns. A 1-year Bitcoin return of, say, 50% may seem high in most circumstances, but it is low compared to historical average annual returns.

Investors prefer clear regulation, results show

The findings of the study are clear that increased regulatory clarity is beneficial to the price of Bitcoin, both on an absolute and relative basis. The advantage of high regulatory clarity is that the longer the event occurs, the more clearly it will be seen. Except for China, regulatory events for Bitcoin in other countries have positive returns in the 6-month and 1-year cycles after occurrence, while the returns in shorter cycles are more mixed. This means that a high level of regulatory clarity, while not always perfect, is appreciated by investors. It is worth noting that it is not possible to directly observe the effects of regulation, since a myriad of factors affect prices at any one time. However, we believe that the effect of this noise is somewhat offset by the large number of events covered in our study.

As mentioned above, the biggest exception is China, which has been downright hostile to the digital asset ecosystem. Starting in 2013 and banning trading and mining in 2021, a barrage of regulations has further restricted cryptocurrencies until only peer-to-peer activity remains — as it is difficult to ban. China's actions may technically bring regulatory clarity, but its regulatory environment is the worst. In the case of China, our data suggests that their actions have not been as supportive of prices as had been speculated.

looking to the future

The good news is that few countries in the world have shown such outright hostility towards digital assets as China. Recent examples of regulatory pushes, such as the White House executive order to ensure responsible development of digital assets and the Responsible Financial Innovation Act introduced by Senators Lummis and Gillibrand, have a more balanced tone. But while not every regulatory development is positive, we believe that as long as investors are aware of the rules, even if they are far from ideal, they all have a positive effect on prices.

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