As the South Korean government backs away from a full-scale ban, investors should be thinking more and more about political risk. How do you protect your crypto investments against sudden shifts in the regulatory landscape?
One option is to avoid cryptos altogether. I know the potential returns are seductive, but if you can’t take the heat, maybe kitchens aren’t the best place for you.
On the other hand, you could ask: Which cryptos are likely to survive the regulatory purge?
I’ve used this thought experiment before—it’s worked extremely well. It made me bullish on XRP when it was in limbo at $0.17, IOTA when it was at $0.50, and NEM when it was at $0.21.
All three cryptos have more than quadrupled since then!
So, how does it work?
Well, first, you have to think like a regulator. Imagine that your job is not to make money, but to protect the socio-economic fabric of a country. You would, in this case, regard pure currency plays (like Bitcoin or Litecoin) as a potential threat to stability.
After all, countries need to control their money supply in order to prevent financial disasters. Without the power to print your own currency, countries run the risk of becoming Greece, trapped in the jaws of a supranational central bank.
Giving up the power to print money is Europe’s grand problem. It gave the European Central Bank financial power over distinct political units, which almost everyone sees as a historical mistake.
Daily Ethereum Chart
With this in mind, can you see countries subverting their national currencies in favor of Bitcoin? Of course not.
They may not regulate against Bitcoin specifically because a clone could replace it in purpose, if not in name. But they can make it impossible to pay essential services (like taxes, utilities, rent) in cryptocurrencies, thus rendering virtual currencies impotent.
Ethereum, on the other hand, is not crippled by this type of regulation.
It is a platform designed to foster decentralized applications. So if energy companies want to implement blockchain solutions, they can build smart contracts on the Ethereum platform. And transacting over that platform takes place via ETH. It serves technology more than it serves finance.
Here’s my point: Ethereum is non-threatening to regulators.
If you’re skeptical, consider that ETH prices held up considerably well during the last week. Other cryptos were depressed from regulatory concerns, but the Ethereum to USD rate increased to $1321.37.
What does this tell you? To me, it says regulators are less likely to have an impact on platforms with a broad set of use-cases. They don’t care if apps are built on client-server or blockchain technology. That’s way outside their wheelhouse.
By consequence, this puts some aspects of Ethereum beyond reach.
This isn’t my full investment thesis for Ethereum, but it illustrates (in admittedly broad strokes) why ETH carries less political risk than Bitcoin. Namely, that it centers more around technology than finance, and regulators generally keep their hands free of technology.
In any case, we believe that ETH will reach our $1,500 Ethereum price prediction this quarter.
Source: Price Confidential