Not only that we can see $15k for the Bitcoin price, but most likely $16k is in the cards too. How come? For one thing, Bitcoin price action remains bid. The market keeps forming higher highs and higher lows, a typical bullish formation.
Moreover, the cryptocurrency formed an inversed head and shoulders pattern. The dive in March represents the head for the pattern, then the market broke the neckline ($10k), retested it, and now is ready to go for the measured move.
A Surge in Cryptocurrency Deposits
The good news for Bitcoin continues to resurface. It started with MicroStrategy announcing an investment of over $100 million in Bitcoin. It continued with Square announcing $50 million. The PayPal news last week was responsible for a new leg higher in Bitcoin.
This week it is the Silvergate Bank. The California based bank just announced that it accepted deposits in cryptocurrency in excess of half a billion dollars. While not that high as in Q4 2017, it reflects a strong appetite for cryptocurrencies from the general public and something that keeps a bid tone behind the Bitcoin price.
Bitcoin Price Technical Analysis
A close look at the chart below reveals that the measured move (i.e., the blue line) exceeds $15k. In fact, it stretches all the way to $16k and a bit more. Therefore, any bullish trade should consider the $16k as the target.
After a head and shoulders formation, the price typically retests the neckline. While not a mandatory condition, it happens most of the time. Moreover, when it does, it is a sign that reinforces the pattern.
To make the most of this pattern, bulls may want to go long at the market and set a stop-loss order at the $10k level while targeting the $16k. While the risk-reward ratio is not that impressive, it allows traders to participate in the bullish price action.
The investment bank makes a bullish comment for bitcoin as an "alternative currency" that not only serves as a storehouse of wealth but also as a means of payment.
The tide is changing.
This week PayPal announced support for cryptocurrencies, and now JP Morgan is changing the tune, as it says, Bitcoin is competing with gold as an "alternative" currency.
The physical gold market, favored by older generations, is worth $ 2.6 billion, including assets held within gold ETFs.
Bitcoin, on the other hand, has a market cap of $ 240 billion and is mostly favored by millennial investors. In 2020, to date, Bitcoin has increased by more than 80% compared to almost 25% of gold.
To recover in terms of market value, the leading digital currency would have to rise more than 10x above current levels. JPMorgan said in a note on Friday,
"Even a modest agglomeration of gold as an 'alternative' currency in the long run would mean doubling or tripling the price of bitcoin"
Over time, the investment bank said that crypto could be owned for reasons other than just being a wealth store like gold is.
"Cryptocurrencies derive from value not only because they serve as stores of wealth, but also because of their usefulness as a means of payment. The more economic agents accept cryptocurrencies as a means of payment in the future, the greater their usefulness and value"
PayPal also mentioned that the payment company's endorsement is "another big step towards corporate support for bitcoin". This, they said, would further reinforce the use of BTC millennials as an alternative currency.
Greater interest in institutional investors
Overall, the long-term potential for bitcoin is considerable, as it competes more "intensely" with gold, "given that millennials would over time become a more important component of the investor universe," says JPMorgan.
Millennials and corporate support for digital currency have also sparked greater interest from institutional investors, the report says.
This is evidenced by the peak of activity in both bitcoin futures and options in CME. Prior to Paypal's announcement this week, open interest on CME's BITCOIN futures measured a record of 10.5K contracts per day in the third quarter, an increase of 32% in terms of the second quarter and an increase of 127% compared to 3rd quarter of 2019.
In addition, the institutional flow registered strong growth, with 692 new accounts added, and the number of large holders of OI also registered an average of 79 in the 3rd quarter, an increase of 64% in relation to the 3rd quarter of 2019.
"Holy Cow. Most of the bullish bitcoin comments I read from JP Morgan," noted Dan Tapiero, co-founder of 10T Holdings. "A piece of widespread investigation reaches all customers of the bank. Paypal has announced" coverage "for other traditional players to get involved," he added.
The last three months in Bitcoin have been marked by large corporate entities that have transitioned significant parts of their treasury holdings to bitcoins. In August, software intelligence company MicroStrategy announced that it has bought 0.1 percent of the total supply of BTC (its CEO Michael Saylor has already reached the ceiling and become something of a celebrity in space).
The large payments company Square, which for some time has offered BTC exposure to users of its mobile payments platform, allocated $50 million of its assets to bitcoin in early October. And just yesterday, the British fintech company Mode allocated 10% of its cash reserves to buy BTC as a treasury asset.
To compile this trend into a single, easy-to-digest database, Rodolfo Novak of Coinkite, also known as NVK, has launched bitcointreasuries.org. It lists the companies that have made the transition to keep bitcoin as a treasury asset, along with its market limits, the base price of their investment relative to today's value, the amount of BTC they hold and, critically, the percentage of the total supply of BTC that each bought. The allocations listed a total 3.74% of all bitcoin that will exist.
"I always assumed there was a place where you could see, not a complete list, but a list of large bitcoin holders who are not private entities," Novak told Bitcoin Magazine. "Especially with publicly traded companies because they have all their public books anyway and it's all audited. But I couldn't find anything and I love buying domains, so I started bitcointreasures.org [ ] in the hope of creating more FOMO for other companies"
The list consists mainly of blockchain-focused companies that have divested into BTC some time ago as part of their larger business missions. The Grayscale Trust, for example, holds the highest proportion of bitcoins on the list by far 2.17% of the total supply.
But many of the purchases or filings listed on the site occurred this year. Novak explained that while it may seem that many companies are jumping into Plan B at once, it is likely that even the most recent purchases have been planned for a long time, demonstrating HODLer's understanding of the asset.
"Corporate governance, especially for publicly traded companies, moves at a slug pace," he said. "So there must be some mechanisms in place - a kind of model of how to do this. And it took years to get done and, you know, bitcoin goes up, bitcoin goes down. And if you haven't been in this space for a decade, it's hard for you to understand that after bitcoin decreases, it increases again. The number goes up"
But the reasons for switching to a heavy treasure trove of bitcoins should be clear, especially in recent months.
"You have this value reserve, everything meets the pleasure of value booking," Novak said. "And, you know, you hold it because you still want to be above water 30 years from now…. It's like, 'Hey, I got money in the bank, it's going to suck, I need to find a solution.' And, you know, gold pet stones are not a solution"
What does this mean for Bitcoin?
As there is a finite supply of bitcoin (there will only be just a little less than 21 million BTC thrown into circulation), when any entity grabs a significant amount, it affects everyone who wishes to get their hands on some as well. And, as an important value proposition for bitcoin is this scarcity, these corporate purchases have implications for the price of bitcoin relative to fiat as well.
As a Bitcoiner who is ahead of corporate interests, Novak is optimistic about the trend.
"Everything is good for Bitcoin, right?" he asked. "The scarcity of bitcoins comes from the people who buy, right, and you have a stock limit for that. So the more these giants buy, the more the price goes up for everyone"
He also pointed out that the more different types of entities start retaining bitcoin, the more the network as a whole will benefit.
"You want your enemies to have bitcoin, you want your competitors to have bitcoin," he said. "Because the more types of people with different sets of preferences, different sets of incentives have, the more secure the network will be... If Kim Jong-un has bitcoin and the US has bitcoin and China has bitcoin, it's in everyone's interest not to make any changes to Bitcoin, right? Because if one wants a change that is beneficial to them, others will want that change as well. So it's a nice set of incentives"
Some retail investors may see this trend as a warning to stack satellites while they are still available. But Novak points out that while the list of bitcointreasuries.org is growing, there is still a significant opportunity to get ahead of most corporations.
"The little boy still has a chance to win a Berkshire Hathaway. You can even DCA for $10 a week or anything, and you can buy before them. So I don't think it's an opportunity that people should waste. It's a crime not to have exposure to bitcoin right now"
Where is this trend going?
When asked where the trend is going in the corporate allocation of BTC, Novak said he thinks bitcointreasuries.org will no longer exist in 10 years because "every publicly traded company that has treasury management in assets that are not just the dollar, they will have some exposure to bitcoin."
This seemed to be a matter of inevitable "hyperbitcoinization", but in the short term, it may help that some groups already on this list have published their disinvestment methodology in BTC. For example, Square has released a white paper detailing its investment. Novak could see this being used by other groups that are interested in following him toward Plan B.
"They have created a model that other publicly traded companies in the U.S. can simply follow and comply with regulations to do so. Now, just go to a [corporate] board and show that role. You go to your legal, show me that paper. Conformity, show me that paper, that's it. Just make the transfer and buy bitcoin"
A high run in the near future will likely also motivate more companies to follow Square's example. But the ultimate motivator may just be bitcoin's final game. Companies that have already arrived in bitcointreasury.org have adopted an amazing tool to choose to leave the legacy financial system if and when that is necessary. Others will want to join them.
"Now they have an instrument they can just send elsewhere. Let's say America decides to go to shit, right? They could just send this BTC, they don't need permission"
As Bitcoin trading volumes decrease, the asset is being viewed more as a rare asset than as a negotiable currency.
Data says bitcoin is being used more as an investment than a negotiable currency.
The currency is seen more as a protection against volatility in the fiduciary markets.
Now it's behaving more like assets, including fine wines, rare whiskeys and classic cars.
Just over 12 months ago, the number of Bitcoins circulating in the markets was twice the second most liquid asset, Ether, the currency of Ethereum. Today, the opposite is true.
In fact, bitcoin trading volume has declined since 2018, but as we've seen this year, the price of Bitcoin has risen, surpassing $13,000 for the first time this year.
While we know that the price of Bitcoin goes up and down all the time, crypto market watchers in 2020 seem to be coming to similar conclusions: the nature and scope of this recent Bitcoin bull run looks and feels different.
In today's Market Watch (in association with AAX) we'll explore why this happens and why Bitcoin is now being treated in a similar way to how investors buy and maintain luxury items like wine, whiskey and watches.
Bitcoin becomes an asset
First, let's take a look at how the behaviour of Bitcoin traders has changed.
The number of Bitcoin addresses with more than 0.1 coins (currently about $1,188) is at an all-time high, and the number of addresses with more than 100 currencies (currently $1,188 million) has reached a six-month high, according to Glassnode.
The number of cryptographic whales, those that hold more than 1,000 BTC, also reached an all-time high in August this year.
It's not hard to see why. According to analysis site Glassnode: "98% of all unspent Bitcoin transactions (UTXOs) are currently in a profit state."
This has been a trend that has been maturing over several years, according to Grayscale's Bitcoin valuation report. In the newspaper, the grayscale noted a sharp increase in the number of holders - people holding Bitcoin for more than three years - versus speculators, people who have moved Bitcoin in the last 90 days.
The report also indicates that there has never been a higher level of Bitcoin owned for more than a year. Bitcoin is becoming a reserve of value, not a trading currency, which we will explore further in the next section.
Ethereum and Tether become the currency of cryptography
As we said before, just a year ago, Bitcoin was the lifeblood of cryptocurrency liquidity markets. But things are different now.
Ethereum's blockchain is now processing more than twice the volume of daily bitcoin blockchain transactions, riding a wave of massive growth in stablecoins and the DeF applications that use them.
A new report from crypto research firm Messari on third-quarter activity in DeFi and stablecoins revealed that the current 30-day average for Ethereum is about $7 billion; Bitcoin is below $3 billion.
If current rates remain, Ethereum is on track to see more than $1 trillion in annual transaction volume, a major reversal from 2019, when the volume of Bitcoin transactions was more than double that of Ethereum.
The tether, however, is not only the most traded stablecoin - Messari found that during the summer he grew up and surpassed even Bitcoin with an average 30-day transaction volume of nearly $3.5 billion.
Bitcoin has been knocked out of its traditional position, which is another reason why the prospect of Bitcoin is becoming more of a luxury asset than the cryptocurrency of the day. In the last section, we'll look at the similarities between how Bitcoin behaves and how other luxury assets behave.
Bitcoin, the fine wine of cryptography
When investors look at whether an asset or commodity is worthy of investment, one aspect they pay attention to is something called a stock-to-flow model.
This is a calculated value by dividing the existing supply of a commodity by the annual growth of the production of that commodity. Commodities with high stock rates for flow include gold, silver, wine, art, classic cars, watches and, yes, Bitcoin. Let's take the gold as an example.
The World Gold Council says approximately 190,000 tons of gold has already been mined. Let's call it stock. Every year, the gold industry withdraws from the soil something between 2,500-3,200 tons. This is the flow. In this case, the ratio between stock and gold flow is 59. This means that, at the current rate, it would take 59 years to extract 190,000 tons of gold. That means its value will remain very well.
Bitcoin's cash flow stock has behaved with a high correlation with this model. In essence, bitcoin's value is expected to increase as the amount of Bitcoin produced decreases over time, thanks to the way the network was built.
Assets like these are also seen as protection against market volatility.
Most market watchers see gold as a symbol of the investor's intent. When markets are down, the price of gold tends to rise. Which is true, as the graphics below attest. As stock markets have become more volatile this year because of COVID-19, so did the price of gold as investors rush to it as a refuge.
But buying and storing gold is difficult and involves a legion of intermediaries who charge for this privilege.
When investors fail to get their hands on gold, they look for other rare assets to put their money, such as wine, whiskey and watches, among other luxury items.
These assets have to deal with similar aspects of supply and demand, scarcity and availability, which has made investors look for rare items to keep as an investment. Take whiskey, for example.
According to the Knight Frank Wealth Report, the value of the rare whiskey industry has grown 564% in the last 10 years, with a 5% gain this year. Fine arts are up 141%, wines 120%, cars 194% and watch 60%. As the stock market's performance has faltered this year thanks to a global recession, investors are picking up the best things and holding them back because, like gold, there aren't many of these luxuries being produced or coming to market every year, so their value increases. Let's look at the watches in more detail, in particular the Rolex.
Rolex manufactures approximately 800,000 watches a year, giving it a constant supply. However, the availability of these watches is scarce. Waiting lists for popular models can reach five years, and access to these waiting lists is granted to existing customers who have bought Rolexes before.
Rolex also regularly stops tracks, increasing their shortage. For example, a type of Rolex, nicknamed "The Hulk" (because it's all green), was discontinued this year, causing its price to rise 200% in a few months.
This leads to a grey market, where the price of Rolex watches exceeds what you would pay in retail if you could get one, which makes them a surprisingly good investment. The same applies to certain types of wine, art and cars: there are not many of them and they perform better than other asset classes. Just like Bitcoin.
Bitcoin is not gold
Although Bitcoin is often compared to the response of cryptography to gold, this column states that it is more like a rare consumer commodity than gold, thanks to the way it is managed, bought and sold.
The supply and distribution of gold are managed by large institutions and state actors. It is also heavily regulated to prevent the entry of fake gold into supply - although it is more difficult to keep counterfeit precious metals out of the supply chain than people initially thought.
The supply and distribution of fine items such as wine or watches are not managed in the same way. Instead, it is a market more similar to buying and selling cryptocurrencies. There are brokers, and exchanges, buying and selling to individuals and legal entities in a more fluid way, without the same federal or institutional supervision. And a lot of people want it to stay that way.
Bitcoin, like a good wine, gets rarer over time, and investors are loving it.
The balance of Bitcoins on some of the major exchanges is falling rapidly, according to recent data.
There are many reasons why this may be the case, including the newly discovered appreciation of BTC.
With only a few exchanges seeing these reductions, many believe they are losing customer confidence.
The supply of Bitcoin (BTC) held by major exchanges has fallen to levels that have not been seen in the past two years. The last time BTC's balance on major trading platforms was so low was in 2018, according to data collected on October 20.
People are realizing the value of Bitcoin
The crypto industry grew rapidly throughout 2020 and for a number of reasons. The existing crypto community has been buying with the intention of HODLing since BTC fell for the third time, expecting prices to skyrocket.
Then there was the COVID-19 pandemic, which caused the global economic collapse due to pure fear of what it can do to various sectors. In the end, the world began to realize something that the crypto industry has known for years – BTC is the only asset that offers a solid monetary policy.
At least that's what Nexo co-founder Antoni Trenchev recently noted. He said BTC is the best performing asset of the decade and that the world has begun to realize this.
He added that the community is resorting to self-care solutions, which include platforms such as Nexo itself. These platforms allow tax-saving loans against assets that users already own.
There is no need to sell to win, and all the popularity has generated more discussions about crypto than ever before.
BitMEX and Bitfinex may be losing users' trust
Celsius co-founder Alex Mashinsky expects this state of affairs to continue unless the exchanges change the terms of the deals they are offering in order to lure users back to their platforms.
Not all exchanges are affected equally, of course. Platforms like Binance and Coinbase, which offer good conditions to their users, have kept their funds. Meanwhile, companies like Bitfinex and BitMEX have seen severe reductions in their assets.
The rise of the DeFi sector has undoubtedly contributed as well as the growing interest of institutional investors. They used companies such as grayscale and Microstrategy to accumulate large amounts of BTC throughout the year. Anyway, some exchanges seem to be losing the trust of their users, though not all, as mentioned.
Bitcoin Group SE concludes merger of Bitcoin Deutschland AG with Futurum bank AG in Germany's first crypto bank.
- Merger of Bitcoin Deutschland AG with Futurum bank AG registered in the commercial register
- Combined entity to operate under the name of Futurum bank AG
- Encryption and custody under the aegis of the Futurum bank AG from a single source
- Effects of high synergy at the organizational level
- New growth boost of institutional clients
Herford, October 22, 2020 - Bitcoin Group SE (ISIN DE000A1TNV91 ) has closed the merger of Bitcoin Deutschland AG with Futurum bank AG. Germany's first crypto bank is the result of the unification of the bitcoin.de and all investment banking services of Futurum bank AG. After successful registration in the commercial register on October 13, 2020, the combined entity will operate under the name Futurum bank AG. The integration measure is thus also concluded at company law level.
Upon completion of the merger, Futurum bank AG now groups all licensed regulatory assets held in the Group under an entity that has already been licensed under regulatory law. This results in high synergy effects within Bitcoin Group SE, reducing organizational and regulatory complexity. In addition, this measure strengthens Bitcoin Group SE's offering as a cryptocurrency trading platform and depositary. Futurum Bank AG can offer customers an even better service from a single source.
This marks another significant step in diversifying the business model. BaFin has established a unified legal framework for banks to offer and store cryptocurrencies. Bitcoin Group SE also makes use of this possibility and extends the provision of crypto custody services to the entire Group of companies. In the future, Europe's largest crypto trading platform will also be available to institutional clients through Futurum bank AG. The new customer base opens up new prospects for added value growth for Bitcoin Group SE.
"Market participants, both private and institutional, are looking for lucrative investment opportunities outside the Euro and US Dollar & Co. Cryptocurrencies are highly appreciated for their high returns and security features. Our reliable and attractive portfolio of services, which is already used by more than in the future, 884,000 private clients will also be open to institutional investors through the newly formed Futurum bank AG. We expect this to result in significant growth boosts for Bitcoin Group SE," said Marco Bodewein, Ceo of Bitcoin Group SE.
About Bitcoin Group SE: The Bitcoin Group SE is a holding company focused on innovative and disruptive business models and technologies in the areas of cryptocurrency and Blockchain. Bitcoin Group SE holds 100% of the shares of Futurum Bank AG, which operates a trading market for the digital currencies Bitcoin, Bitcoin Cash, Bitcoin Gold and Ethereum under Bitcoin.de, as well as classic investment services and 50% of the shares of Sineus Financial Services GmbH, a financial services provider overseen by BaFin.
Bitcoin Group SE is listed on the Düsseldorf Stock Exchange Primary Market and on all other German stock exchanges (symbol: ADE, ISIN: DE000A1TNV91, GSIN: A1TNV9).
Bitcoin has been here for over ten years. When it was first "invented" in 2009, it was more of an underground "currency" than formal digital money. At that time, only a few enthusiasts were playing with it, and it had almost no value. One Bitcoin user in 2011 even put 10,000 pieces of BTC at auction for only $60 - but no one bought it. The first real-world purchase of Bitcoin was for a pizza in exchange for 10,000 BTC.
Now, Bitcoin is widely used by many people and is even regarded by many as the "digital gold" of this era. No longer an ignored form of digital currency, it is now widely used in many things: shopping, trading and online investments, online gambling through Bitcoin casinos and many other things.
How does BTC work when it comes to gambling? What are Bitcoin casinos and how do they work? Is it different from how existing online casinos now work? Here are the things you need to know.
How do Bitcoin casinos work?
A Bitcoin casino is no different from the traditional online casino you probably know. It mainly offers a similar set of games that you can find in all online casinos. The only difference is that this type of casino accepts Bitcoin as the only form of payment.
Here are some of the most popular Bitcoin casinos of the moment:
Bc - casino . With
What makes it very attractive to players?
There are many reasons why many players choose to go to an online casino that operates only through BTC. From security to convenience issues, here are some of the reasons.
Many people attach great importance to their online security and privacy, including online players. That's why some people even fall for the terrible mistake of using fake details when signing up for an account, only to end up being suspended if not banned from the site.
One of the security protocols for online gambling sites is for their customers to provide verification information. This will sometimes be requested early on, although some require only identity verification before the customer's first withdrawal.
A Bitcoin casino removes all of this. Since all you need is a Bitcoin wallet ID, which is not linked to any personal information about you, you can technically play, deposit and withdraw without disclosing any personal or financial information.
No transaction fees
Regardless of the payment method, you are using - a bank account, debit or credit card or an e-wallet -
What you should know
Although owning Bitcoin is technically recognized as a legal thing for most of the world, it has not yet been recognized as a real currency or legal course. Most countries, although they consider Bitcoin and other forms of cryptocurrency legal, only see them as property, but not as legal currency.
When it comes to online betting using Bitcoin, no clear or definitive law makes it illegal or even recognizes it as legal. Technically, as Bitcoin is not recognized as a legal currency, there may be complications as to its legality. However, this subject can be confusing and complicated. If you are looking to play in a Bitcoin casino, the best thing to do is to do thorough research on how cryptocurrency usage works for gambling and the possible risks that come with this.
Bitcoin rose with renewed optimism for the second coronavirus stimulus package, while the US dollar plummeted.
House Speaker Nanci Pelosi said a committed aid bill is on the way after confirming a fruitful 45-minute phone conversation with Treasury Secretary Steven Mnuchin. Simultaneously, Senator Mitch McConnell, the majority leader, warned his lot not to negotiate a pre-election agreement, stating that the U.S. cannot tolerate another major federal package.
In April, Congress approved a $2 trillion aid fund to help American families and businesses during the coronavirus blockade. The flood of new money into the economy through the Federal Reserve's unprecedented bond-buying program also fixed markets that had broken in March.
Bitcoin was among the fallen. The reference cryptocurrency plummeted more than 60% in just two trading days. However, his recovery gained momentum after the approval of the $2 trillion stimulus package. At one point in the third quarter, the BTC/USD exchange rate rose nearly 230 per cent from mid-March lows.
The stimulus, therefore, played a critical role in determining Bitcoin's next bias. But with the exhaustion of the existing package and a delay in the approval of the second before the U.S. presidential election, the cryptocurrency has entered into a medium-term conflict of prejudice.
On Wednesday, BTC/USD rose 2.79 per cent to $12,256. At its intraday high, the pair was trading at $12,322, their best level since August 2020.
Anthony Pompliano, the co-founder of Morgan Creek Digital, said in a note to investors earlier this week that he expects Bitcoin to grow about 10 times its current spot rate.
"The Federal Reserve cut interest rates to 0%. They plan to keep us in a zero-rate environment in the near future. Several stimulus packages in 2020 now total more than $3 trillion in QE. We have another $2 trillion on the way… My base case for [Bitcoin] is approximately 10x to $100,000 and the bull's case is about $250,000 per Bitcoin"
At the same time, Pompliano warned that the cryptocurrency may suffer a wild fall correction as it aims for a valuation of $100,000 in 2021. But he remained confident that investors would continue to reallocate their portfolios to the nascent asset.
"I'm encouraging you to re-examine Bitcoin as a potential allocation of 1 to 10% in your portfolio over the next 15 months," he told investors.
The Bitcoin futures market has not shown as much enthusiasm for rising prices as the spot market. According to data collected by Glassnode, funding rates on major cryptocurrency exchanges, including Binance, Deribit and BitMEX, turned negative over the weekend. It was the same period when Bitcoin closed above $11,000.
The trend remained the same on Wednesday, as the cryptocurrency surpassed $12,000. This, at best, showed caution at the end of futures operators. This may lead to down corrections in the near future.
The regulator justified the ban by saying that cryptocurrencies are difficult to price, volatile and vulnerable to fraud
The UK's decision this month to limit retail access to cryptocurrency-linked financial derivatives has caught the attention of legal experts in the United States and is fueling a debate over whether Washington could follow the decision in London, especially if Democrat Joe Biden wins the presidency.
Robert Hockett, a professor at Cornell Law School, may be an atypical one in the debate, but he says the Financial Conduct Authority's ban on trading derivatives based on cryptocurrencies like bitcoin and ether in the United States. The FCA oversees the UK regulatory financial sector
Hockett told CQ Roll Call that the restrictions could be a first step towards preventing another financial crisis.
Derivatives can greatly increase payout or loss when the value of an asset increases or decreases. In the United States, it is legal for retail investors to trade futures and options on cryptocurrencies, allowing them to bet on long-term trends or gain more leverage than buying the currencies directly.
The UK regulator justified the ban, which will come into force next year, saying cryptocurrencies are difficult to price, volatile and vulnerable to fraud. It's allowing larger, more sophisticated investors to continue trading them.
Hockett said the ban represents the UK's first "foray" into combating digital currencies, even if it covers a small part of the cryptocurrency market.
The ban signals to the industry that regulators will not "sit back and watch you set fire to everything again," Hockett said. "We're watching and we're going to start introducing limits now, like requiring you to have fire extinguishers and limiting the amount of flammable material you can have when playing with matches."
Protection has a price
Others working with cryptocurrencies said limiting retail investors' access to derivatives may be a fair approach, but disagreed with Hockett on its significance.
Ariel Zetlin-Jones, professor of economics at Carnegie Mellon University, said she did not believe cryptocurrency markets would reach a size that could threaten financial stability without the significant involvement of banks, which would have to comply with existing regulations.
Regulators have good reason to think about investor protection when it comes to cryptocurrency-linked derivatives, he said in an interview but noted that these protections come at a cost.
"These derivatives markets are extremely complex. While the cryptocurrency exchanges that create them trade in an easy-to-understand way for retail investors, I think they're anything but," he said. But they make cryptocurrencies more liquid or easier to trade, which makes prices fairer for the underlying assets.
Zetlin-Jones said he did not think the US would follow the UK's lead and ban products because futures and options based on digital currencies are already available through regulated exchanges and trading platforms.
Richard Levin, president of the technology practice and financial regulation at Polsinelli PC, said the use of cryptocurrency derivatives in retail is so small that the UK ban probably won't have much impact.
For the most part, institutional investors, such as investment firms or hedge funds, not retail investors, are trading derivatives. The FCA is protecting less sophisticated investors from new and complex products that they may not understand, he said.
"It's not going to stifle innovation. It's just a reasonable reaction to concerns about a sophisticated product being offered to people who lack the sophistication to market the product."
Levin said he doesn't believe there's more regulation on cryptocurrency derivatives in the United States because the Securities and Exchange Commission and commodity futures trading commission already limit retail investors' access to swaps, which must be offered by regulated exchanges and trading platforms.
These layoffs miss the main point, Hockett argued. There is "growing concern" that encryption could become "the next domain of the shadow banking system," he said.
The term, coined by economist Paul McCulley in 2007, refers to non-bank companies that provide services similar to those of a commercial bank outside of the regulations. The idea gained prominence during the last financial crisis, partly due to the role that the shadow banking system played in the recession.
At the time, the parallel banking system described by McCulley was largely involved in products such as derivatives and complex securitized assets, among others. While much of this activity was handled by the Dodd Frank Act of 2010, there is now concern that this behaviour may appear elsewhere, including cryptocurrency, Hockett said.
Hockett compared the market to mortgage-backed securities, a derivative that grouped residential mortgages and contributed to the 2008 crash. At the moment, cryptocurrency markets have been eased by the popularity of mortgage-backed securities in 1999 or 2000 - a "small but rapidly growing player," he said.
"If the pace is the same, then it seems to me that in three to four years we will be looking at a possible systemic danger. It may end up happening faster than that because, in a way, encryption seems to be spreading faster than [mortgage-backed securities]."
Disclosure is the key
Thomas Chippas, CEO of ErisX, called the UK to ban unfair. He said it keeps cryptocurrency products in a different pattern from other complex investment vehicles. ErisX offers bitcoin futures, although it is unlikely that the company will be directly affected by the ban because its customers in the UK are institutional investors, Chippas said in an interview.
"I think disclosure is always a much better approach than the total ban," Chippas told CQ Roll Call, adding that there is a lot of data available on the cryptocurrencies underlying derivatives - and in some ways, it is more extensive than the information available on other commodities.
"Everyone knows how many bitcoins will be produced. Everyone knows how often they're being produced. Everyone knows the incentives of miners and the network. All the data is there. You can't tell me how many ounces of gold will come out of the earth."
In addition, investors have no shortage of complex financial products that they can already access, such as leveraged exchange-traded funds. The same approach, which relies on disclosure, should be used for investment products linked to bitcoin and other cryptocurrencies, Chippas said.
At the very least, the UK ban highlights what U.S. regulators, particularly the CFTC under President Heath Tarbert's leadership, are hitting, Chippas said.
The narrative has changed since a few years ago when the cryptocurrency's complaint was that regulators had made it too costly to get approval for new products, he said.
"We've moved on to now. And it turns out that if you just lower your head and put your back down, you can. In fact, regulators have improved things along the way."
Bitcoin has seen massive capital flows from large investors and corporations throughout 2020, which may be what allowed its price to trade well above where the year began - despite the turbulence seen in the first few months.
There is a high possibility that BTC will continue to gain adoption among non-retail investors as well in 2021, with the trend of being a reserve asset gaining momentum as more companies, funds and large investors acquire it.
Retail investors are also rapidly using Bitcoin to protect against the turbulence and inflation seen around the world, which is elucidated by the growing number of new portfolios with sub-1 BTC balances.
There is a frequently forgotten investor class that could be the next source of fuel for Bitcoin: sovereign wealth funds.
One network analyst explained that there is currently $8.5 trillion being administered by nations, and virtually zero has been allocated to Bitcoin.
He says an ideal portfolio going forward will require this, which could mean that a big advantage is just around the corner.
Bitcoin continues to benefit from economic turmoil
At the time this article was written, Bitcoin was trading up to more than 2% at the current price of $11,800. This marks a remarkable increase from its recent lows of $11,200, set during a recent settlement.
The recovery from these write-offs, coupled with a drop above $11,800, significantly strengthened his short-term outlook.
Whether or not he can break above his next key resistance at $12,000 will likely have a serious influence on his short-term outlook, as a rejection here could trigger a long-range downtrend that degrades his current technical strength.
Network analyst: sovereign wealth funds are the next big buyer of BTC
Bitcoin is already being adopted by family offices, public and private companies, as well as by institutions. Still, there is an even larger group of investors who have not yet allocated in BTC.
A respected network analyst explained in a recent tweet that there are about $8.5 trillion in sovereign wealth funds belonging to nations. Currently, its BTC exposure is zero.
"We talked about $5T in cash in corporate treasuries of public companies. What has not been talked about are the $8.5T deposited in sovereign wealth funds, i.e. 'the wealth of nations'. Your exposure to Bitcoin is zero, your ideal portfolio will require it. "
If these investors allocate only a small fraction of their AUM to Bitcoin, this could be a source of serious capital entry into the reference cryptocurrency.
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