Author: Emanuele Filippozzi
On September 24th the price of one Bitcoin dropped by $1,000 in half an hour. However, this is not the first time we see such a drop in price. In fact, we can notice that this trend is repeated at least once per month since May this year. An important aspect to report is that exchanges that sell “long” bitcoin derivatives contracts (meaning that traders own the security because they expect prices will rise in the future), asked gamblers for more and more collaterals. That caused everyone to leave the market. Over the day, $643m-worth of Bitcoin contracts has been liquidated on Bitmex, a crypto and derivatives trading platform. As a consequence, bets on other cryptocurrencies also became toxic. Crypto-derivative products, which include options, futures and other things are popular. According to Chainalysis, a research firm, more than $23bn have been traded so far in 2019. But episodes such as last month’s one have put them under regulators’ radars. Japan is considering stringent registration requirements for crypto trade platforms. Hong Kong forbids retail investors from accessing crypto funds; Europe imposed severe restrictions since last year. Now FCA, the UK financial conduct regulator, is considering a global ban on selling crypto-derivatives to retail investors, but its official decision will be revealed in early 2020. In the real world, importers purchase derivatives as a defence against slumps in their domestic currency. But crypto-monies are not legally recognised as currencies because they do not reliably store value and moreover they are not widely accepted. For these reasons, it would take an earthquake for the FCA if it hadn’t refer it to the press ahead. From what I mentioned above we can now understand that such derivatives are marketed as investment products. They are not tempting places to put savings yet. Prices across cryptocurrencies are highly correlated, suggesting that demand does not derive from usage or technological advances. Instead it responds to hype of that moment. In fact, Bitcoin is four times more volatile than risky physical commodities. The FCA thinks also that crypto amateurs do not understand all of this. It estimates that investors in Britain made total losses of $492m on crypto-derivatives from mid-2017 to the end of 2018 and the net profit was only $33.7m, mostly captured by the largest investors. The FCA thinks that its ban could reduce consumer losses by up to $309m a year. Insiders disagree. They think crypto-derivatives are just as risky as other derivatives. A ban could mean that consumers invest directly in unregulated cryptocurrencies. In any case, according to Danny Masters (a crypto vehicles seller at CoinShares) says that “The regulator should not be choosing which technology thrives or fails”. Yet it is part of the FCA’s mandate to protect consumers against predators. Almost $1bn in virtual coins were stolen from crypto-exchanges and infrastructure last year, a number that is more than tripled from 2017. Such thefts strongly hitted the value of derivatives, and will continue to do so in the future if such attacks get increasingly frequent.
Manipulation is also popular. This bring us to mention a thought shared from David Gerard, a Bitcoin sceptic, who says : “Retail investors are diving in a pool of sharks ”. As regulators close in on market abuse, defenders of crypto-derivatives are running against the wind.