Selling and promotion of Bitcoin and its derivatives to amateur investors is being banned in the UK by the financial regulator and the FCA (Financial Conduct Authority). This comes days after the US authorities indicted the owner of BitMex for operating wihout being a US registered and allegedly failing to follow the anti-money laundering rules.
Other operators are vulnerable to indictment as well, as it is reported that many firms involved in crypto investment are operating without licenses.
From the outside it all seems doomed for anyone hoping that more investors put more money in cryptocurrencies. But we are not sure on a close inspection.
Drop and oceans
The FCA’s ban was to prevent amateur investor to buy and sell the likes of cryptocurrency futures and options, people used it as a way of hedging their bets on an underlying asset. For example, you would buy an option to sell come bitcoins at today’s price and if the price fell by 10%, which gives you kind of of an insurance policy.
The reasoning behind the FCA’s ban, was to protect amateur investors who don’t understand the market from abuse and financial crime, as the cryptocurrencies are volatile and hard to accurately value.
This ban does not include professional traders of firms like hedge funds, which have access to riskier financial products than the amateur investors do. Many flashy trading sites offer the general population quick and easy entry to the world of trading, and many “influencers” who encourage people to enter more complex trading.
Reports suggesting that more than 4% of the UK population own cryptocurrencies. Three quarters of them have holdings worth less than £1,000 which technicaly qualifies them as retail investors. There is no exact number on how many UK investors use crypto derivatives, but we know for sure that the worldwide trade in these products was nearly a fifths of the total crypto market back in 2019 and has been growing rapidly in 2020.
eToro have said earlier this year that only about tenth of their retail investor spend was on this segment so they are not the main users of derivatives. However, it is easy enough to avoid FCA jurisdiction by using non-uk based exchanges. It is expected to redude the losses and fees of investors by £19 million and £101 million.
The ban does not affect the worldwide market. The UK crypto market is very small compared to the global cryptocurrency holdings, which are worth about $335 billion. So the FCA’s ban would not be expected to effect on the prices of bitcoin and ethereum and sure enough, it didn’t.
Volatility and excessive risk
Historically, bitcoin has had a volatile and therefor many specialists insist that it could not serve as a store of value and so becoming a functional currency, but some argue that by banning some derivatives you could reduce its volatility.
When people buy derivatives especially in the Asian market, they allow you to borrow 15 times the size of the trade and there are some that offer up to 100 times the value of the trade, this leads to being highly levered and therefor making greater potential gains or losses.
When trades are being leveraged, investors enter and exit the market quickly since their trade results is multiplied by the proportion they have borrowed. This is exactly what causes the volatility in prices; however, bitcoin has been trading at an all-time low so the ban may not achieve much in this aspect.
Not o render the ban meaningless. Any derivatives make the markets more efficient by allowing investors to hedge their bets together, so any partial ban in some countries means a step backwards for cryptocurrencies as a whole. There is also the possibility that other major regulators such as the SEC in America or BeFin in Germany to follow suit.
This damage could be amplified if other major authorities in the US were to indict other unregistered exchanges like BitMex which could lead to liquidity problem as most investors will draws their money in masses. BitMex have reported that almost 30% of customer funds have been withdrawn since the US had issued charges and says it is open for business with no problem.
When it comes to the UK ban, I would argue that curtailing excessive risk taker from amateur traders in an industry where vanilla cryptocurrencies is risky enough seems logical to me. And I have certainly met many traders who are very knowledgeable and certainly know what they are doing, and I am sure they are many who don’t understand the risks they undertake.
Keeping it positive in the end, the FCA’s reasoning by the ban was that there are no reliable basis for accurately valuing cryptocurrencies. They did not say that there no value in them which is a valuable shift from regulators who have been saying in the past. This means that bitcoin is becoming widely acceptable.