Is this week’s crypto bounce the beginning of an upcycle, or just a momentary adjustment?

Coinbase Bytes

After months of cloudy forecasts, crypto prices finally rallied this week, with the total crypto market surging about 15% to $2 trillion. In the wake of positive headlines — including increased crypto adoption by individuals and institutions as well as signs pointing to potential near-term regulatory clarity — BTC and ETH climbed by 25% and 40% respectively from their January lows. But are we seeing a sustained uptrend or is this just a short-term adjustment? Let’s take a look at the bigger picture.

• Governments around the world are clarifying their stances on cryptocurrencies via a wide range of policy initiatives — some supportive, some less so. Portugal, for instance, is pursuing 0% crypto taxes in an effort to bolster innovation in the space. The Indian government, which as recently as November was pursuing legislation outlawing crypto, is now considering a proposal that would legalize it with a 30% tax on crypto income. China, on the other hand, has broadly cracked down on the industry. Last summer, crypto prices tumbled after China banned Bitcoin mining, paving the way for the debut of their government-issued “digital yuan” at the Winter Olympics this week. 
• In the U.S., congressional hearings are examining crypto policy this week. The bipartisan Senate Agriculture Committee is holding a hearing today, featuring CFTC Chair Rostin Behnam. Underlying this meeting is a fundamental crypto policy question: Should crypto be regulated as a security or a commodity? Commodities (like gold and oil) are regulated by the CFTC, while securities (like stocks and bonds) are regulated by the SEC. While the CFTC has said that BTC, ETH, and (most recently) USDT are commodities, SEC Chair Gary Gensler has said that many crypto assets are securities. Ultimately, more clarity is still needed about how digital assets are regulated.
• A top Treasury Department official testified in front of the House Financial Services Committee, with the aim of creating “consistent” and “clear” rules for a stablecoin market that has grown into the hundreds of billions of dollars. And a bipartisan group of lawmakers has proposed a bill that would eliminate tax obligations for capital gains under $200 — potentially making it easier to use BTC for everyday purchases.
• Meanwhile, tech firms and Wall Street continue to explore crypto — even as stock markets are reeling in the wake of Meta’s 25% plunge. On Tuesday, an ETF that invests in publicly traded Bitcoin mining companies was listed on the Nasdaq under the ticker “WGMI” (crypto slang for “we’re gonna make it”). In related news, “Big Four” accounting firm KPMG Canada announced that it has purchased both BTC and ETH for its treasury, Google’s CEO says the company is “definitely looking at blockchain,” and Disney appears to be hiring a business developer with “a passion” for NFTs.

Why it matters… Crypto adoption continues to surge — with a recent survey finding that one out of ten global internet users has purchased some cryptocurrency. But if you ask investors still on the sidelines why they have yet to participate, one of the primary concerns they cite is regulatory uncertainty. With a variety of hearings and pending legislation, and the White House’s forthcoming executive order about actions the United States government will take regarding digital assets, the smart money will be paying close attention.

William P. Eason