Why Bitcoin, Ethereum and Solana were on fire this week

What happened

It’s not unusual for the crypto market to fluctuate wildly from week to week, but this week was particularly chaotic. Regulators have been cracking down on crypto firms in the US, and that could hurt demand for cryptocurrencies in the short term. But the market reacted positively.

According to data provided by S&P Global Market Intelligence, as of 12pm ET Friday, Bitcoin (BTC -1.66%) has jumped 11.6% in the past week, Ethereum (ETH -0.90%) was up 9.6%, and Solana (SUN -2.88%) rose 9.7 percent.

So what

Regulatory measures were swift this week. The Kraken exchange’s betting services were shut down, the New York Department of Financial Services ordered Paxos to stop minting BUSD stablecoins, and the Commodity Futures Trading Commission charged Vista Network Technologies and its CEO, Armen Temurian, with fraud.

Speculation early in the week was that this action would spread to more established companies such as Coin base (COIN -2.17%) and Circle, the company behind the USDC stablecoin. But that doesn’t seem to be the case yet. Coinbase has said that its staking solutions are not securities and that it is willing to fight that battle in court.

The staking shake-up could affect Ethereum and Solana because they are proof-of-stake blockchains. But the problem regulators see does not seem to be proof of stake, but rather the rewards given to depositors. There is no clear guidance, but Kraken offered a return product and Coinbase offers direct rewards based on Ethereum stake returns, which have not come under the same scrutiny.

Late in the week, the SEC proposed a change to federal custody rules that would define which companies could hold customer cryptocurrency and which could not. It is not clear who will be approved or which cryptocurrencies will be approved, but at least this is a step in the right direction.

It is also worth noting that China has been reported to be showing more interest in crypto recently. Tencent is starting to build Web3 and metaverse spaces, and Hong Kong is rumored to open up to crypto buying and selling this summer. If China and Hong Kong open up to crypto, it will bring new buyers into the market.

What now

Safety is usually better than uncertainty for the market, and that seems to be where crypto traders were leaning this week. The SEC and other regulators are going after crypto hard, but at least we can know the rules of the industry soon.

Coincidentally, the regulatory breach makes the case for many of the decentralized use cases for crypto. Self-storage, decentralized security, and transactions that regulators can’t block are part of the point of crypto.

I don’t know if this week’s regulatory actions will be bullish for crypto or not, but the market thinks it is, and I think it could force Congressional action in the US eventually. It might be good in the long run, but it will be a rocky ride to get to a point of stability, so don’t be surprised if this week’s move doesn’t last long.