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Bitcoin

Bitcoin falls close to US$6,000 after EU rules against leveraged trading

Concerns grow that Asian regulators would mirror Brussels and cut leverage levels 

PUBLISHED : Friday, 30 March, 2018, 8:01pm
UPDATED : Monday, 02 April, 2018, 1:44pm

Bitcoin traded down at US$6,617 on the first-day of the long Easter weekend on Friday – its lowest-level since February 6 when it broke below US$6,000, as new European Union (EU) rules aimed at reducing leveraged trades offered by brokers prompted a widespread sell-off on fears of similar measures being launched in Asia. 

Earlier this week, the European Securities and Markets Authority (ESMA) issued a set of product intervention rules that will drastically cut leverage limits for cryptocurrencies to 2 times for retail investors, which are being offered by brokers through a derivative called contracts for differences (CFD). 

Traders said that represents a drastic cut from what typically would be 15 times leverage being offered by major exchanges, such as those in Japan, and brokers.

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That sparked what amounted to be a “spectre of deleveraging” that drove Friday’s sell-off. Such a “spectre” could continue to weigh on global bitcoin demand for at least the short term, they added. 

“Leverage has been a big driver for bitcoin trading. US$6,000 is a key psychological level, and if we broke it (again) then bitcoin would be poised for a further downward side, which I wouldn’t be surprised might eventually hit US$2,500,” said Stephen Innes, head of Asia-Pacific trading for online currency trading platform Oanda. 

Bitcoin recovered some lost ground after lunch on Friday as it traded back up to around US$7,082 by 17.53 HK time, the bitcoin (USD) price index quoted by Coindesk showed. 

Leverage has been a big driver for bitcoin trading. US$6,000 is a key psychological level, and if we broke it (again) then bitcoin would be poised for a further downward side, which I wouldn’t be surprised might eventually hit US$2,500
Stephen Innes, head of Asia-Pacific trading for online currency trading platform Oanda

Innes said Japanese retail investors have been a key trading-volume driver globally, accounting for 40 per cent of the daily average. 

“When you cut leverage from 15 times to 2 times, it means that anyone who had been trading at 15 times leverage, on US$10,000 capital who was able to buy US$150,000 worth of bitcoin on margin in his account, could now hold a position of US$20,000 worth of bitcoin,” said Innes. 

That caused investors to rush to sell on Friday, as they attempted to cut their losses, now the new rules mean that highly-geared positions could soon be culled. 

Online brokers such as eToro have also been offering leverage on bitcoin trading through CFDs.

To put the kind of leverage used in trading bitcoin into context, professional foreign exchange traders would typically employ only between 5 to 10 times leverage. 

For an alternative asset class that has been trading in huge volatility and a short trading history (bitcoin was launched in 2009), some industry players consider 15 times leverage as too aggressive. 

Although the ESMA intervention rules will only affect product providers in the EU, industry players say global regulators do tend to act in-sync with each other, which sparked the contagion fears in Asia. 

There is now an expectation that Asian regulators will mirror the latest ESMA rules to prevent the building of leverage, and pre-empt the creation of further risk on their financial systems. 

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The ESMA measures apply specifically to product providers selling to retail investors. That group also includes any person marketing, distributing or selling CFDs to retail investors in the European Union, including investment firms and banks. 

The rules are now being translated into all official EU languages, a process expected to take “a number of weeks”, ESMA said. 

At that point, the measures will be sent for publication in the Official Journal of the European Union, and be implemented two months after its publication, ESMA said.

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