The View
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Bankers don’t care if bitcoin is a bubble, as long as it can be traded

No longer just a refuge for criminals, cryptocurrencies have respectfully graduated to greed and speculation, aided and abetted by legitimate financial institutions

PUBLISHED : Thursday, 21 December, 2017, 11:39am
UPDATED : Saturday, 23 December, 2017, 7:16pm

Bitcoin shows there is so much more to seduction than just showing up hungry. Over the Christmas holidays bitcoin (or cryptocurrencies) will shove aside family dinner topics as you or your relatives regale each other with real and virtual profits.

Bitcoin continues to trend upward. Retail and institutional investors’ unrealised gains are also swelling. Fewer investors are exiting their investments. Mainstream media attention and word of mouth assure that the investor universe is expanding. The main issue is how many are employing leverage from their brokers.

Bitcoin has grown in value from about 39 US cents to over US$18,000 in just eight years while doubling over December with US$290 billion of market capitalisation. Once the refuge of criminals’ illegal activities and illicit transactions, it has respectably graduated to greed and speculation, aided and abetted by legitimate financial institutions. Mainstream media has been brilliant: when the legend becomes fact, print the legend.

Now that the debate over whether bitcoin is a scam or the ultimate democratisation of finance has become even more polarised, we can move onto the issue of how to make money or avoid losses in bitcoin trading.

Bitcoin’s critics may revile its credibility, but if it rises another up 50 per cent then funds and individuals are missing out on a huge trade. But, like all professional investors or speculators you must ask what exactly is your methodology? If you cannot answer that question, you are not ready to be risking money. Don’t forget that subprime mortgages were once legitimate and credible, then their entire valuation and process became detached from reality.

Everything surrounding bitcoin development will be controversial and fused with the uncertainties of financial behaviour and psychology. After the demoralising financial crisis, trust in technology seems more attractive than government or markets. Except that all are driven by humans.

Perhaps it is the new, but secret portfolio strategy that private bankers refuse to admit that clients gravitate towards after being inflicted with 10 years of zero to low interest rates- ditch diversified holdings for a conflicting blend of low risk, low return deposits and high risk, high return investments.

That legendary, fundamental investor Bill Miller has 50 per cent of his hedge fund in bitcoin shows its irreverent, institutional appeal. Or one of the early bitcoin hedge funds, Pantera Bitcoin Fund, returned 25,000 per cent since its inception in 2013 for a 250 per cent compounded annual return based on a simple buy and hold strategy. Compare that to the top performing hedge fund in the world last year, which returned 148 per cent, according to consultant Prequin. Seeking obscure, contrarian strategies remains an important source of absolute returns- even if they appear dubious.

Leveraged bitcoin trading accounts are available in Japan. The same 25 times leverage limits that applies to forex trading are being applied to bitcoin. Unlike other countries, Japanese banks can deal in bitcoin. China’s banning of bitcoin exchanges has apparently driven Chinese traders to Japan. But the regulations are quite loose. Investors risk losses exceeding their margin. Losses could be greater as intraday volatility is higher for bitcoin compared to forex trading. Thus, brokers must deal with a higher risk of liquidity problems and insolvency.

“Since Japan made bitcoin legal tender its trading volume in country has risen. But, it is still early to determine whether bitcoin trading will be centralised in Japan or South Korea. But as regulators around the world clarify policies, positive market sentiment will likely continue to expand,” said Ken Lo, founder and CEO of ANX International.

Leveraged forex trading has been conflated with bitcoin as speculators cross trade into US dollars or Japanese yen. Bitcoin was intended to be an autonomous form of currency as people were able to spend and use it instead of other currencies. But, in its early stages of development, it is being traded against other fiat currencies, which generates its own additional volatility.

The CBOE Futures Exchange began offering bitcoin futures trading on December 10 and the CME commenced trade on the 18th. The start of bitcoin futures contract trading not only provides a hedge, but signifies that the market’s price discovery function is being better utilised. It will increase bitcoin trading volume, but raise the concentration of systemic risk. However, the main trading disadvantage is that these exchanges are only open from normal trading hours, while bitcoin trades globally, 24 hours a day, seven days a week.

The Futures Industry Association (FIA) has criticised the Commodity Futures Trading Commission who “self-certified” new contracts for bitcoin futures. The FIA is worried about the lack of consultation on basic issues such as margin levels, transaction limits, stress tests and settlement procedures.

The only people who complain about a financial bubble are those who are not inside making money from it. Trade bitcoin knowing that at some point the price will: correct, fall, crater- choose your description. Investors will face their first panic run. Massive shorting of the futures will only accelerate any vicious decline. Then, we will see which group will re-enter and buy or average down at whatever support level is defined. Otherwise, bitcoin could fall to earth and keep on falling to zero.

Then, we will learn whether bitcoin and cryptocurrencies possess more value other than being built around independent, theoretical distributed systems that do not have an underlying value like precious metals and oil. And the defiant moment of truth is that value cannot possibly be guaranteed by any issuer because there is no issuer.

Peter Guy is a financial writer and former international banker

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