The crytpocurrency community breathed a long sigh of relief today as prices bounced back to something less dire. Bitcoin made a sustained rise of 37 percent, Ripple staged a less impressive recovery of 14 percent, while Ethereum went up a respectable 23. But before you feel too relieved, these numbers can be deceiving. And that's because after you suffer a crash, any recovery always seems better than it actually is. For instance, imagine you buy $100 worth of Bitcoin and it instantly falls 50 percent. You check the next day and its gained 50 percent. What’s your portfolio now worth? A mere $75.
Here's that equation:
You suffer a loss of 50 percent (100 x 0.5 = 50). You get a 50 percent rise (50 x 1.5 = 75) and because 50 percent of 100 is more than 50 percent of 50, the fall in the price (50 percent of 100) loses you more money than the rise wins you back.
Anyway, these recoveries came off the back of some positive developments on the regulation front. I say positive because that’s oddly how they’re being received. It’s almost like crypto traders have been so traumatised by recent regulation-fuelled collapses that they’ve developed a kind of financial Stockholm Syndrome to sympathise with the government bureaucrats who had originally sought their destruction.
For example, the US Senate Committee held a “measured” and “sophisticated” hearing earlier in the week that touched on cryptocurrency regulation. A longstanding Washington banking and finance lawyer summarised the hearing as establishing consensus on the "need for clearer jurisdictional lines" on the regulatory font. Zoe Dolan, an American crypto lawyer (who knew such a title existed?) instantly took to Twitter to report feeling “so bullish” that she “can hardly stand it.”
But markets weren’t quite so enthusiastic and made only a small recovery. Traders also appeared to gloss over the statement from the head of the Bank for International Settlements who described the sector as a “Ponzi Scheme” and effectively urged central banks to stamp them out via regulation.
It is perhaps a sign of maturity that markets are now reacting positively to talk of regulation. But then again, perhaps it’s just a momentary recovery on the long road to all the other burst bubbles (tulips and Japanese real estate anyone?)
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