Exploring the Path of Herd Mentality: Tracing the Evolution from Tulip Mania to Crypto ETFs
The psychology of herd mentality plays a significant role in influencing regulators’ decisions on cryptocurrencies and has implications for the future of the market. In January 2024, the U.S. Securities and Exchange Commission (SEC) approved the first-ever spot Bitcoin exchange-traded funds (ETFs), setting a precedent that other countries and regions quickly followed. Hong Kong regulators approved the launch of spot BTC and Ethereum ETFs in April 2024, and now the European Union (EU) is considering a similar move. The European Securities and Markets Authority (ESMA) is seeking expert opinions on adding crypto to the investment product market, including assessing whether Undertakings for Collective Investment in Transferable Securities (UCITS) could include crypto assets. If approved, UCITS funds could become one of the largest mainstream funds with crypto exposure. This trend reflects a herd mentality among regulators, with jurisdictions like Hong Kong and the EU embracing crypto shortly after the U.S. approval. This raises questions about regulators worldwide and the potential impact on the crypto market. Will other countries follow suit? Let’s explore further.
The concept of herd mentality bias is a psychological phenomenon in which individuals base their actions on the behavior of a larger group. This behavior often leads to market bubbles or panics, as individuals buy or sell assets simply because others are doing the same. The psychology of herd mentality in trading suggests that people may follow the crowd out of a sense of safety or fear of missing out (FOMO). The International Monetary Fund (IMF) identifies three main reasons for succumbing to herd instincts: the belief that others have valuable information, incentives provided by compensation schemes, and an intrinsic preference for conformity.
Historical examples, such as the Dutch tulip mania of the 17th century and the dotcom bubble of the late 1990s and early 2000s, demonstrate the impact of herd mentality in finance. In both cases, speculation and herd behavior led to unsustainable price increases, followed by dramatic collapses.
The U.S. currently ranks as the third-largest crypto market globally, with approximately 52 million users. This large user base, coupled with a significant percentage of users holding substantial amounts of crypto, highlights the U.S.’s importance in the global crypto trade and commerce market. Regulatory decisions in the U.S. carry substantial weight and often influence other jurisdictions. It is likely that regions like Hong Kong and the EU are following the U.S.’s lead due to the belief that regulated crypto investments are the future of finance and FOMO. However, this alignment could also lead to regulatory arbitrage and competition among countries vying to attract crypto businesses and investors.
There is a notable discrepancy between the European Central Bank (ECB) and the ESMA regarding their stance on crypto assets. While the ECB has expressed strong skepticism, particularly towards Bitcoin, the ESMA has shown a more open approach. This raises questions about coordination and coherence within the EU’s regulatory efforts.
The ESMA’s consideration of adding crypto assets to UCITS has several implications for the crypto market. Firstly, inclusion in UCITS would grant crypto assets higher legitimacy and recognition in mainstream investment circles. Secondly, mainstream acceptance could drive increased liquidity and market expansion, attracting more institutional and retail investors. Lastly, aligning regulatory approaches across jurisdictions could lead to greater harmony and reduced uncertainty for market participants.
Experts in the field acknowledge the trend of countries following the lead of the U.S. in regulatory decisions. They emphasize the U.S.’s influential position in financial markets and how its approval of spot BTC ETFs has catalyzed other countries’ considerations. The approval of ETFs could lead to increased crypto adoption as mainstream investment options and potentially drive market participation and growth in the long term.
Different regions are seen as potential candidates to follow this trend. Countries in the APAC and MEA regions have already made crypto-friendly moves and are actively trying to establish themselves as crypto hubs. The potential approval of an Ethereum spot ETF is also a significant catalyst, with Hong Kong already approving spot ETH ETFs and the U.S. SEC reviewing the matter.
Looking ahead, expect a global trend of countries considering similar products following the approval of spot BTC ETFs in the U.S. and Hong Kong. Keep an eye on announcements from regions like APAC and MEA, Australia, and the UK. However, as countries compete to attract crypto businesses, regulatory competition may arise, presenting both challenges and opportunities. These developments indicate the progress made in the crypto market and suggest there is still a long way to go.
