How does the psychology of herd mentality influence regulators’ decisions on crypto and what does it mean for the future of the market?

In January 2024, the U.S. Securities and Exchange Commission (SEC) made a historic decision, approving the first Bitcoin spot (Bitcoin) exchange-traded funds (ETFs). This measure triggered a global ripple effect, with other countries and regions quickly following suit.

Following the US example, Hong Kong regulators approved the launch of spot BTC and Ethereum (ETH) ETFs in April 2024. Now, the European Union (HUH) It is contemplating a similar move, with the European Securities and Markets Authority (YOU ARE BAD) seeking expert opinions on adding crypto to the investment product market.

ESMA’s investigation includes assessing whether undertakings for collective investment in transferable securities (UCITS) can include cryptographic assets.

These investment funds, valued at a staggering 12 billion euros ($12.95 billion), are already diversified across multiple asset classes such as structured loans, commodities and emission allowances, and cryptocurrencies could be next from the queue.

If approved, UCITS funds could become one of the largest conventional funds with crypto exposure, albeit in a diversified way.

This transition reflects a herd mentality among regulators, with jurisdictions like Hong Kong and the EU embracing crypto within months of US approval.

What does this say about regulators around the world and what could it mean for the crypto market this year? Would this inspire other countries to follow suit? Let’s dive into it.

Is crypto herd mentality at play?

Herd mentality bias is a psychological phenomenon in which individuals rationalize their actions based on the behavior of a larger group.

This behavior can manifest itself as buying or selling assets simply because others are doing the same, leading to market bubbles or panics.

The psychology of herd mentality in trading suggests that individuals may follow the crowd out of a sense of security or out of fear of missing out (FOMO).

The International Monetary Fund (IMF) identifies three main reasons traders and investors succumb to herd instincts: the belief that others have access to valuable information, incentives provided by compensation schemes, and an intrinsic preference for conformity.

One of the earliest documented examples of herd mentality in finance is the Dutch tulip craze of the 17th century. During this period, tulip bulb prices reached extraordinary levels, driven by speculation and herd behavior. The bubble eventually burst, leading to a dramatic collapse in prices.

In more recent times, the dot-com bubble of the late 1990s and early 2000s is another example of herd mentality in action. Investors flocked to Internet-related technology stocks, driving prices to unsustainable levels. When the bubble burst, many of these companies went bankrupt.

Meanwhile, the U.S. currently ratings as the third largest crypto market in the world based on total number of users, standing at around 52 million. This large user base, along with approximately 45% of users containment $5,000 or more in crypto suggests the importance of the US in the global crypto trade and trading market.

As a result, regulatory decisions in the US carry substantial weight and often influence other jurisdictions to follow suit. It is likely that regions like Hong Kong and the EU are following the US’s lead, possibly due to the belief that regulated crypto investments are the future of finance and FOMO.

However, this alignment can also lead to regulatory arbitrage and competition between countries competing to attract crypto companies and investors.

ECB vs ESMA: rivalry in the making?

Just a few months ago, in February 2024, the European Central Bank (ECB) express strong skepticism towards crypto assets, especially Bitcoin.

This skepticism echoes your position of November 2022, where they mentioned Bitcoin’s shortcomings, such as its limited use in legitimate payments and environmental concerns related to its mining process.

The ECB’s position is clear: Bitcoin has not lived up to its promises of becoming a global decentralized digital currency or viable financial asset.

In contrast, ESMA has demonstrated a more open approach to cryptoassets. This raises the question of why there is a discrepancy between the ECB’s caution and ESMA’s position.

This divergence between the ECB and ESMA raises concerns about the coordination and coherence of regulatory efforts in the EU, leaving several questions unanswered.

However, ESMA’s consideration of adding crypto assets to UCITS has several implications for the crypto market:

• Greater legitimacy: Inclusion in UCITS would grant cryptoassets a higher level of legitimacy and recognition in mainstream investment circles.
• Market Growth: Mainstream acceptance could drive increased liquidity and market expansion. More investors, both institutional and retail, may enter the market, increasing demand for investments in cryptocurrencies.
• Regulatory harmonization: Aligning regulatory approaches across jurisdictions could lead to greater harmony and reduced uncertainty for market participants.

What do the experts think?

Crypto.News spoke with Edul Patel, CEO and co-founder of Mudrex, and Rajagopal Menon, vice president of WazirX, and gained key insights into this discussion.

Herd mentality among regulators

Both Patel and Menon recognized the tendency for countries to follow the US example in regulatory decisions.

Patel emphasized the US’s status as the largest and most influential power in financial markets. He highlighted that the SEC’s approval of spot BTC ETFs was an important catalyst for other countries to consider similar products.

“The United States has long been the largest and most influential power in financial markets, largely due to its status as a developed nation….Cryptocurrency was first introduced and widely adopted in the U.S. before spreading to the rest of the world. world…Following SEC approval recommendations and observing traction and inflows for these ETFs, Hong Kong also approved Bitcoin and Ethereum spot ETFs. This approval inspired confidence, leading more countries to plan similar actions in the coming months.”

Menon echoed similar sentiments. He noted that U.S. approval of policies often leads to their widespread adoption.

“The US has a strong advocacy network in the crypto community that is instrumenting regulatory green flags. Typically, all policies become dominant after US approval due to the fact that it is one of the largest economies and the strength of the dollar and its index impact the prices of different assets.”

Implications for the crypto market

Discussing the implications of these trends for the crypto market, Patel noted that the approval of spot BTC ETFs could lead to greater adoption of cryptocurrencies as mainstream investment options.

“There is currently FOMO in the market as prices have peaked after a two-year bear cycle. But in the longer term, with the launch of Bitcoin spot ETFs and more institutions and retail investors entering the market, this is likely to drive greater adoption and growth.”

Menon echoed Patel’s observations. He suggested that the approval of ETFs could potentially lead to increased market participation and long-term growth.

“The impact of Bitcoin after the halving is different this time, as the range of interested parties is broader than at any other time in history. For the first time, the enthusiasm of retail investors has induced FOMO among institutional investors and they are heavily devouring ETFs to add to their portfolio.”

Countries likely to follow suit

Both experts identified different regions as potential candidates to follow the trend of approval of similar products. Patel mentioned:

“Australia is currently on track to launch Bitcoin spot ETFs by the end of the year. In a similar move, the London Stock Exchange recently announced its plans to begin accepting orders for Bitcoin and Ether Exchange-Traded Notes (ETNs).

Menon added that countries in the APAC and MEA regions have facilitated many crypto-friendly actions and are actively trying to establish themselves as crypto hubs. He suggested:

“APAC and MEA countries could be aligned to create products that allow Trad Fi retail investors and institutional investors to gain exposure to crypto through services like ETFs. They have facilitated many crypto-friendly moves and are actively trying to build a crypto hub.”

Potential impact of an ETH ETF

Regarding the potential approval of an Ethereum spot ETF, Patel highlighted the approval of spot ETH ETFs by Hong Kong and the ongoing review by the US SEC as key catalysts. He suggested:

“Hong Kong has already approved spot ETH ETFs and the US SEC is reviewing this. Therefore, other countries are also likely to follow the trend soon.”

Meanwhile, Menon added:

“Ethereum ETFs are in a speculative stage. Grayscale recently withdrew its Ethereum Futures ETF application due to ambiguity surrounding approval. However, if there is a chance that other economies could take the lead on this, it could be Singapore or Japan, given their progressive yet investor-friendly approach to crypto adoption.”

What to expect next?

Following the approval of spot BTC ETFs in the US and Hong Kong, a global trend of countries considering similar products is expected. Look for ads from regions like APAC and MEA, Australia, and the United Kingdom.

However, as countries compete to attract crypto companies, regulatory competition may emerge, leading to challenges and opportunities. Overall, these developments indicate that cryptography has come a long way and still has a long way to go.

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