Golden Observation | Many countries tighten regulation and interest rate hike expectations heat up again, and the crypto market falls across the board

Unprecedented fiscal and monetary stimulus measures led by the Federal Reserve have sparked a crypto investment boom over the past period of time, but with the recent intensification of discussions on interest rate hikes and the tightening of cryptocurrency regulation in many countries, the crypto market has generally fallen. As of press time, Bitcoin has fallen below $56,000 and Ethereum has fallen below $4,000.

The crypto boom since the second half of 2020 is closely related to the Federal Reserve. Loose monetary policy usually fuels financial booms, and the current policy is particularly loose. The Federal Reserve has kept interest rates near zero for the past year and hinted that it will not change for at least two years. This has led to a boom in the capital bond market, including crypto. Then the inflation problem caused by continued easing has to be solved.

Data showed that U.S. inflation hit a 30-year high last month, and Reuters analysts said U.S. inflation will remain above the Fed's target until at least 2024. Amid global supply chain disruptions and a sharp improvement in the job market, the Fed, like most major central banks, is expected to act sooner rather than later. Analysts brought forward their expectations for a 25 basis point rate hike by one quarter to the fourth quarter of 2022, with two more rate hikes in the first and second quarters of 2023, bringing rates to 1.25%-1.5% by the end of 2023.

In addition, on November 16, two former Fed chairmen said that in order to control inflation, the Fed may have to raise interest rates to 3% or even higher. Fed President Evans also said that interest rate hikes may begin next year; interest rate hikes may also begin in 2023, which will depend on inflation. The Fed's economic forecast in September is a bit outdated. It is more open to monetary policy adjustments in 2022.

The current increase in expectations for rate hikes is mainly affected by rising inflation. If the US inflation level continues to rise rapidly, it may, to a certain extent, prompt the Fed to tighten its ultra-loose monetary policy or even start raising interest rates ahead of schedule. The rise in interest rate hikes will naturally affect the crypto boom brought about by the loose policy. However, the shoe has not yet landed, and crypto investors should continue to pay attention to the Fed's judgment on the US inflation trend.

With the boom in cryptocurrencies, problems such as bubble prices, technological disruption, and credit risks have frequently emerged, and regulation has been put on the agenda in various countries.

On November 17, Don Beyer, chairman of the U.S. Joint Economic Committee (JEC), said that increased volatility in the cryptocurrency market or digital bank runs could disrupt more mainstream financial institutions, such as pension funds or mutual funds. The underlying assets have raised concerns about consumer protection due to financial fraud, hacker attacks, and market manipulation.

According to two sources familiar with the situation, India also plans to strengthen regulation of cryptocurrencies to prevent investors from holding cryptocurrencies. Although the government is unlikely to implement its previous plan to ban private digital currencies, it will instead only allow products that have been pre-approved by the government to be listed and traded on exchanges, which is a deliberately cumbersome process. "Tokens can only be traded if they are approved by the government, otherwise holding or trading may be punished," the source said. It is reported that the government aims to introduce and pass a cryptocurrency law in the parliamentary session that begins this month.

China continues to crack down on virtual currency "mining" and trading activities. In addition, on November 17, Kyrgyz authorities discovered and closed a large crypto mining farm in Druzhba, Issyk-Ata region in the north of the country, and seized 2,500 mining machines. Law enforcement officials claimed that the illegal mining facilities caused "huge damage" to the national power grid. They are still estimating the losses and determining whether the mining hardware was legally imported into the country. The data center operates in a greenhouse and is operated by foreigners. The committee added that it is still trying to identify all individuals involved in the incident.

Related measures also include taxation supervision on the government side. Argentina plans to impose a 0.6% tax on companies that provide cryptocurrency trading services. In addition, a subcommittee under the National Assembly of South Korea discussed the postponement of crypto taxation again on November 15. After repeated discussions, the proposal to impose a 20% tax on crypto trading gains will take effect early next year instead of 2023.

It is worth mentioning that despite the current downward adjustment in the cryptocurrency market, GlobalBlock, a British digital asset broker, said that this may be temporary. Freddie Evans, a sales trader at GlobalBlock, said that the pullback was attributed to a series of factors, including the recent strength of the US dollar index and the US infrastructure bill seeking stricter regulation of cryptocurrencies. However, there are still multiple technical indicators that show that the current bull market in cryptocurrencies has not ended, so this continued pullback may not last long.