A report released by the Federal Reserve Bank of Dallas is trying to shed some light on Bitcoin price hikes. According to the report, Bitcoin is not as wild as people might think and it’s constantly reacting to news related to regulatory actions like bans on crypto or securities laws.
The study was conducted using a standard event study methodology (Campbell et al (1996)) to asses the impact of news events on the price of Bitcoin as well as on other cryptocurrencies.
“We find that favourable events coincide on average with a 0.33% return in the 120 minutes around the events (left-hand panel), and a 1.52% return in the 24-hour window around them (right-hand panel). Unfavourable events are associated with a 0.32% and 3.12% lower return over similar windows, respectively“
The study has also examined the price of Bitcoin over longer periods of time. According to the paper, Bitcoin highly favors a defined legal status and its price reacts positively even on longer periods of time.
On the other hand, news that suggest more restrictive standards or regulations seem to be associated with negative returns although this is hardly a surprise.
Bitcoin Highly Benefits From Regulatory Clarity
Everyone knows that Bitcoin and the rest of the market will react negatively when a country threatens or outright bans cryptos. That’s not a surprise, however, seeing that local and positive regulatory news have such a positive impact on Bitcoin and the crypto market is definitely surprising.
According to the study, this probably happens because cryptocurrency still highly rely on regulated institutions to be converted into fiat.
“Our analysis shows that despite the entity-free and borderless nature of cryptocurrencies, regulatory actions, as well as, news regarding potential regulatory actions can have a strong impact on cryptocurrency markets, at least in terms of valuations and transaction volumes. This suggests that at the current juncture, authorities around the globe do have some scope to make regulation effective.“
The research briefly mentions the use of cryptocurrencies in illicit activities, most notably on a large scale. It states that although there have been a few cases, it is not as usual as people think and it’s in fact, quite hard to circumvent capital controls when it comes to big sums of money.