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Here’s why the UK and US’s crypto clampdowns won’t stop Bitcoin trading

The sale and advance of derivatives of bitcoin BTC and other cryptocurrencies to abecedarian investors is being banned in the UK by the banking regulator, the Banking Conduct Authority (FCA). It is a added blow to the beginning cryptocurrency market, coming days after the US authorities accusable the owners of arch crypto derivatives barter BitMex for operating after being US-registered and allegedly declining to follow anti-money-laundering rules.

In view of recent allegation from the University of Cambridge that most firms circuitous in crypto investments are still operating after a license, other operators are potentially accessible to indictments too.

It all sounds like bad news for anyone hoping that more investors will put money into cryptocurrencies. But on a closer inspection, I’m not so sure.

Drops and oceans?

The FCA is preventing retail investors from buying and affairs the likes of cryptocurrency futures and options, which people often use as a way of ambiguity their bets on an basal asset. For example, you might buy an option to sell a assertive number of bitcoin at today’s price if the price falls by 10%, giving you an allowance policy in case the market moves adjoin you.

The FCA said it was introducing the ban from January 6 because abecedarian investors were at risk of “sudden and abrupt losses”. The acumen is that these people often don’t accept the market, there is lots of “market abuse and banking crime” in the sector, cryptocurrencies are very airy and they are hard to value.

FCA web page
The UK regulator is trying to assure investors. Mehaniq

To stress, the ban is not being continued to able traders or institutional firms like hedge funds, which have about been accustomed access to riskier banking articles than the accustomed population. It is about attention people who might have been drawn to bitcoin cerebration “it may be the bill of the future”, having “heard amazing news advantage about the rise and fall”. There are any number of bright trading sites alms them quick and easy entry into this world, and YouTube influencers who agilely animate them to try circuitous trading.

Some 1.9 actor people – around 4% of the adult citizenry – own cryptocurrencies in the UK. Three-quarters have backing worth less than £1,000 and would absolutely authorize as retail investors. We don’t know what admeasurement of UK investors use crypto derivatives, but we do know that the common trade in these banking articles was nearly a fifth of the total crypto market in 2019 (and has been growing rapidly in 2020).

Yet retail investors are apparently not the main users of derivatives. Trading site eToro said beforehand this year that maybe only a tenth of their retail broker spend was on this segment. And with most of the UK accidental using non-UK based exchanges, it’s easy enough to avoid FCA jurisdiction. The FCA says the ban could reduce annual losses and fees to investors by amid £19 actor and £101 million.

The ban also doesn’t make much aberration at a common level. The UK crypto market is small beer compared to global cryptocurrency holdings, which are worth US$335 billion (£258 billion). You would not accordingly have accustomed the FCA ban to have a actual adverse impact on the price of bitcoin or arch another coins like ethereum, and sure enough, it didn’t. In fact, it was widely accustomed by industry assemblage and had arguably already been priced in.

Volatility and boundless risk

The fact that the price of bitcoin is very airy has historically been the affliction of this sector, with many specialists again saying that this prevents it from confined as a store of value and acceptable a anatomic currency. You could argue that banning some derivatives trading has the abeyant to reduce this volatility.

When people buy derivatives, they can be highly levered, acceptation that they are borrowing to access the size of their trade to make greater abeyant gains (or losses). Many exchanges, about in Asia, allow investors to borrow 15 times the size of the trade, while some offer over 100 times leverage.

When trades are leveraged, investors enter and exit the market more quickly, since their loss or gain is assorted by the admeasurement they have borrowed. It’s this effect on the market that increases price volatility. Yet bitcoin has lately been trading at an best low for volatility, so the ban may not accomplish much in this respect.

Rollercoaster on a stock market graph
A day in the life of bitcoin (until recently). Studio77 FX Vector

None of this is to say that the ban is meaningless. Derivatives make markets more able by acceptance investors to hedge their bets, so even a fractional ban in one major country has to be seen as a step backwards for cryptocurrencies. There is also a bigger danger for the industry that other arch global banking regulators such as the SEC in the US and BaFin in Germany may follow suit.

This damage could be abundantly aggravated if the US or other authorities were to indict other unregistered exchanges like BitMex. That could cause a clamminess crisis as investors withdrew their money en masse. Again, we will have to wait and see what happens. BitMex has said that around 30% of chump funds have been aloof since the US issued charges, but insists it is open for “business as usual”.

But as far as the UK ban is concerned, I would argue on antithesis that abbreviating boundless adventurousness by abecedarian traders in a sector where trading boilerplate cryptocurrencies is risky enough seems logical. I have met many “retail investors” in crypto whose depth of ability is refreshing, far beyond that of banking institutions, but there will absolutely be others who don’t accept their risks.

To end on a absolute note, part of the FCA’s acumen for the ban was that there was “no reliable basis” for account cryptocurrencies. It did not say there was no value in cryptocurrencies. That is a apparent shift from what regulators might have said in the past, and is a sign that bitcoin is acceptable more widely accepted.The Conversation


Published October 12, 2020 — 15:00 UTC

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