Regulators and policy makers must sometimes feel their task is thankless when it comes to reining in the consumer-led euphoria sweeping cryptocurrency and financial markets amid Covid-19.

This week’s reaction to crypto exchange Bitfinex reaching a $18.5 million settlement with New York’s Attorney General over allegations that it covered up losses and lied about reserves has pretty much been to carry on as before. “On the grand scale of things, it’s less than a speeding ticket,” one investor told Bloomberg News. The exchange and its affiliated stablecoin, Tether, pegged to the U.S. dollar and traded widely in Asia, have been banned in New York—yet Tether’s $36 billion market value is seven times what it was at the probe’s start.

Regulatory warnings about Bitcoin’s unpredictable price swings—the cryptocurrency is down 14% since Monday, but up 30% over the past month — have struggled to cut through. U.S. Treasury Secretary Janet Yellen called it an “extremely inefficient” way to conduct transactions (which is true), while the European Central Bank’s Gabriel Makhlouf compared it to Dutch Tulipmania (which is more debatable). They’re being ignored in the face of superstar bulls like Cathie Wood of ARK Investment Management LLC or Tesla Inc. billionaire Elon Musk, who expertly push grand tech narratives that capture the imagination as well as cash. Laser-eye avatars are whipping up the crowd.

Tougher measures have also brought criticism. When Nigeria’s central bank ordered local lenders to stop dealing with crypto exchanges earlier this month, citing “inherent” risks and criminal activity, the consumer backlash was echoed by senators who thought the ban went too far. This isn’t just a crypto thing: U.S. politicians on both sides of the aisle leapt to the defense of Redditor day-traders after they were blocked from trading GameStop Corp. Elected officials are often reluctant to damp animal spirits, especially when the narrative is that the “little guy” is being crushed by the system.

Regulators shouldn’t let their guard down despite these obstacles. This is hardly systemic-risk territory right now: The crypto market is worth about $1 trillion, or half that of Apple Inc., and GameStop’s market value of $6.4 billion is even smaller. But the ingredients of a speculative boom are forming, with the potential for greater collateral damage if it ends in tears.

Scammers are prospering amid the hype: Two-thirds of Austrian investment-fraud reports last year were crypto-related. Day traders are swarming: Millions of locked-down punters have stampeded onto brokerage apps like Robinhood, which offer commission-free trades and margin loans to trade in crypto and equities, all in the guise of “democratizing finance”—exactly the kind of overstatement that saw politicians support the reckless flow of easy credit into the housing sector in the mid-2000s.

And Bitcoin purchases from companies such as Tesla and ARK mean crypto sell-offs increasingly have the potential to ripple into the stock market. ARK’s flagship fund recently suffered its worst two-day rout since September. Musk’s trolling tweets also have a habit of sending traders to their screens, such as when he called out crypto prices for looking “high.” Peter Garnry of Saxo Bank says the “Tesla-Bitcoin-ARK connection” can create a negative feedback loop across markets.

William Quinn and John Turner of Queen’s University Belfast, in their comprehensive 2020 history of financial bubbles (which doesn’t include tulips), identify three factors that regulators should always watch for: marketability, the ease with which an asset can be bought or sold; money, the abundance of credit in the system; and speculation, the urge to buy just in order to sell at a higher price. Then it takes a catalyst to trigger the bubble, usually technological innovation (like the internet or railways) or government policy.

Given central bankers’ understandable reluctance to tighten credit conditions mid-pandemic, especially judging by U.S. Federal Reserve Chair Jerome Powell’s comments this week, it might make more sense to focus on reining in marketability and speculation. Regulators need to keep cracking down on fraud too. Social-media disclosure rules need to be enforced so fans and followers know when someone has a big interest at stake. A tax on financial transactions—perhaps the kind of Robin Hood tax that Robinhood is lobbying against—might eventually serve as a speed bump.


None of this is straightforward. Checking market exuberance always has a cost, whether by acting too early and snuffing out confidence or acting too late and facing a big bill to clean up the mess.

But in times of cheap money, expensive lies usually aren’t far behind. This time might be different—but it probably isn’t.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.