Cryptocurrencies and news

Over the last few years starting from 2015, cryptocurrencies have begun to attract much attention because of their meteoric price swings, but at the same time have also raised concerns for regulatory authorities. Even though cryptocurrencies are often thought to operate out of the reach of national regulators, their values and transaction volumes react substantially to news about regulatory actions.

Using a newly available dataset where news events are collected on policy statements released by regulatory authorities, central banks, international institutions and standard-defining bodies, a paper by the Bank for International Settlements (Auer and Claessens, BIS 2018) identifies 151 positive or negative news. For the period between the start of 2015 and mid-2018, the authors regress the log of the ratio between the Bitcoin price eight days before the news arrived and two days after, on a regulatory index based upon news on the regulatory framework, on the likelihood for the Bitcoin of being considered a normal currency, on possible bans and the chance for it to be treated as an ordinary security. The results of this simple model are statistically very strong: general bans on its use in financial transactions, news on applications of laws fit for generic securities negatively affect its price. The same holds true for the news related to the impossibility of treating them as normal fiat currencies. Oppositely, those news events indicating possible novel legal frameworks tailored to cryptocurrencies and initial coin offerings (ICOs) are strongly correlated with the highest price hikes.

Secondly, news on anti-money laundering (AML) and combating the financing of terrorism (CFT) and those about the limitation of interoperability with regulated financial systems have a negative impact on Bitcoin’s markets. Thirdly, general unspecified warnings and the news on a central bank’s possible digital currency issue show no statistical significant effect on the Bitcoin’s price. Finally, the analysis finds that there are big differences in the price of Bitcoin according to the jurisdiction (i.e. the nation where the online exchange is located). This fact is a quite strong evidence of market segmentation.

Some examples are also presented. The SEC decision to reject in March 2017 a proposal to modify stock exchange rules in order to allow the creation of an ETF for Bitcoin caused a tremendous 16% drop in its price in 5 minutes! The confirmation of the denial on the ETF fund listing last July 26th 2018 caused a further 3.7% reduction in a very short time period. In June 2018, when the Japanese Financial Services Agency ordered 6 cryptocurrencies’ exchanges to improve their procedures to prevent money laundering, the Bitcoin’s price dropped even if in a longer time period of some hours. The BIS researchers exhibit that, on average, a positive news coincides with a return of 0.33% after two hours and 1.52% after 24 hours. A negative news lowers those returns by 0.32 and 3.12 percentage points at the same time windows.

Using the coefficients estimated for the above mentioned Bitcoin model, the authors compute a so called cryptocurrency regulatory news index (CRNI). When that index increases (i.e. when there are more negative news), not only Bitcoin’s price drops but so do those of Ethereum, Bitcoin cash, Litecoin, Monero, Zcash and Ripple. The same happens to the number and the volume of transactions, the active addresses and the mining profitability (even though these two statistics are available only for Ethereum and Bitcoin anonymous offshoots).

For what concerns market segmentation, it is evident that news concerning national regulations substantially impact cryptocurrencies albeit they do not have any formal legal homes and are traded internationally. This is quite normal as investors in cryptocurrencies must necessarily rely on regulatory authorities to convert them into fiat currencies at some point in time. Furthermore, many online crypto-wallets are often regulated so that the international arbitrage is consequently limited. Agents cannot easily access cryptocurrencies’ markets abroad, because they do not reside in a particular country or do not have a regular bank account there. These factors cause the segmentation found at a national level. Other examples are given for this case: the so called “kimchi premium” (i.e. the South Korean Bitcoin price being much higher than the US’, even by 50 percentage points sometimes), and the Chinese negative premium in Bitcoin price compared to the US when Chinese authorities released strong, harsh declarations on Bitcoin’s trading.

In the end, the analysis carried out by the BIS show that, at the current juncture, there is room to apply rules to cryptocurrencies. These possibly new frameworks might even boost cryptocurrencies’ prices, signaling a clear preference by agents for a well-defined legal status, albeit with a light regulatory regime.

¹⁾ The measure of profitability is calculated as the revenue from block rewards and transaction fees minus the estimated cost of coming up with a proof-of-work.