The sale and promotion of derivatives of bitcoin and other cryptocurrencies to amateur investors is being banned in the UK by the financial regulator, the Financial Conduct Authority (FCA). It is a further blow to the burgeoning cryptocurrency market, coming days after the US authorities indicted the owners of leading crypto derivatives exchange BitMex for operating without being US-registered and allegedly failing to follow anti-money-laundering rules.
In view of recent findings from the University of Cambridge that most firms involved in crypto investments are still operating without a licence, other operators are potentially vulnerable 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, Im not so sure.
The FCA is preventing retail investors from buying and selling the likes of cryptocurrency futures and options, which people often use as a way of hedging their bets on an underlying asset. For example, you might buy an option to sell a certain number of bitcoin at todays price if the price falls by 10%, giving you an insurance policy in case the market moves against you.
The FCA said it was introducing the ban from January 6 because amateur investors were at risk of sudden and unexpected losses. The reasoning is that these people often dont understand the market, there is lots of market abuse and financial crime in the sector, cryptocurrencies are very volatile and they are hard to value.
To stress, the ban is not being extended to professional traders or institutional firms like hedge funds, which have typically been allowed access to riskier financial products than the general population. It is about protecting people who might have been drawn to bitcoin thinking it may be the currency of the future, having heard sensational news coverage about the rise and fall. There are any number of splashy trading sites offering them quick and easy entry into this world, and YouTube influencers who enthusiastically encourage them to try complex trading.
Some 1.9 million people around 4% of the adult population own cryptocurrencies in the UK. Three-quarters have holdings worth less than 1,000 and would certainly qualify as retail investors. We dont know what proportion of UK investors use crypto derivatives, but we do know that the worldwide trade in these financial products was nearly a fifth of the total crypto market in 2019 (and has been growing rapidly in 2020).
Yet retail investors are probably not the main users of derivatives. Trading site eToro said earlier this year that maybe only a tenth of their retail investor spend was on this segment. And with most of the UK contingent using non-UK based exchanges, its easy enough to avoid FCA jurisdiction. The FCA says the ban could reduce annual losses and fees to investors by between 19 million and 101 million.
The ban also doesnt make much difference at a worldwide level. The UK crypto market is small beer compared to global cryptocurrency holdings, which are worth US$335 billion (258 billion). You would not therefore have expected the FCA ban to have a material detrimental impact on the price of bitcoin or leading alternative coins like ethereum, and sure enough, it didnt. In fact, it was widely expected by industry observers and had arguably already been priced in.
The fact that the price of bitcoin is very volatile has historically been the scourge of this sector, with many specialists repeatedly saying that this prevents it from serving as a store of value and becoming a functional currency. You could argue that banning some derivatives trading has the potential to reduce this volatility.
When people buy derivatives, they can be highly levered, meaning that they are borrowing to increase the size of their trade to make greater potential gains (or losses). Many exchanges, typically 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 multiplied by the proportion they have borrowed. Its this effect on the market that increases price volatility. Yet bitcoin has lately been trading at an all-time low for volatility, so the ban may not achieve much in this respect.
None of this is to say that the ban is meaningless. Derivatives make markets more efficient by allowing investors to hedge their bets, so even a partial 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 leading global financial regulators such as the SEC in the US and BaFin in Germany may follow suit.
This damage could be greatly aggravated if the US or other authorities were to indict other unregistered exchanges like BitMex. That could cause a liquidity 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 customer funds have been withdrawn 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 balance that curtailing excessive risk-taking by amateur traders in a sector where trading vanilla cryptocurrencies is risky enough seems logical. I have met many retail investors in crypto whose depth of knowledge is refreshing, far exceeding that of financial institutions, but there will certainly be others who dont understand their risks.
To end on a positive note, part of the FCAs reasoning for the ban was that there was no reliable basis for valuing cryptocurrencies. It did not say there was no value in cryptocurrencies. That is a noticeable shift from what regulators might have said in the past, and is a sign that bitcoin is becoming more widely accepted.
- Bitcoin Price Targets by Analysts for 2021 and Beyond - Barron's - December 3rd, 2020
- Why Ethereum and Bitcoin Are Very Different Investments - CoinDesk - CoinDesk - December 3rd, 2020
- Bitcoin Sees Record Number of Active Users as Price Almost Hits $20K - CoinDesk - CoinDesk - December 3rd, 2020
- 3 reasons why Bitcoin price violently rejected near $20,000 - Cointelegraph - December 3rd, 2020
- Why one analyst says Bitcoin is on the cusp of busting through $20K - Cointelegraph - December 3rd, 2020
- Dont get caught up in the hype as bitcoin hovers around $19,000 - CNBC - December 3rd, 2020
- Bitcoin Price Hits All-Time High Above $19,000, Topping 2017 Record - The Wall Street Journal - December 3rd, 2020
- Over 5000 Bitcoin Worth $97 Million from the 2016 Bitfinex Hack Spring Into Action - Bitcoin News - December 3rd, 2020
- Bitcoin moves $500K around the globe every second, says Samson Mow - Cointelegraph - December 3rd, 2020
- Bitcoin hit the $19,800 mark. What the IRS wants to know about your holdings - CNBC - December 3rd, 2020
- Bitcoin.com Exchange To List HUB Token as the Next Gen Trust-Based Cryptocurrency | Press release - Bitcoin News - December 3rd, 2020
- Mogo Reports 135% Increase in Bitcoin Transaction Volume in November - Business Wire - December 3rd, 2020
- Bitcoin Climbs to Record High - The New York Times - November 30th, 2020
- Bitcoin Rallies Above $19,000 After Biggest Rout Since Pandemic - Bloomberg - November 30th, 2020
- Canadian Public Company Dumps Ethereum and Monero for Bitcoin | News - Bitcoin News - November 30th, 2020
- Bitcoin may see major price volatility at the start of December Here's why - Cointelegraph - November 30th, 2020
- Weekly Recap: Bitcoin and Ethereum Trigger Mass Liquidations - FX Empire - November 30th, 2020
- Russia to Recognize Bitcoin as Property With Legal Protection | Regulation - Bitcoin News - November 30th, 2020
- Bitcoin, Ethereum, Ripples XRP, Litecoin And Chainlink Suddenly Bounce Back - Forbes - November 30th, 2020
- Fighting Definancialization: Cryptologic Methods Like Bitcoin Could Protect Wealth From the Great Reset | Featured - Bitcoin News - November 30th, 2020
- Some Investors Predict Bitcoin to Hit $100,000 in a Year - VOA Learning English - November 30th, 2020
- Introducing MoonDeFi, a New Part of Decentralized Finance | Press release Bitcoin News - Bitcoin News - November 30th, 2020
- Bitcoin analysts explain what's next in the aftermath of BTC plunging to $16.2K - Cointelegraph - November 28th, 2020
- Bitcoin loses steam after nearing all-time highs, but trader says it could be on track to $74,000 - CNBC - November 28th, 2020
- Bitcoin plunges by nearly $3,000 after closing in on its all-time record - CNBC - November 28th, 2020
- Veteran Analyst Says BTC Might See Further Correction but 'Prices Have Not Topped' | Markets and Prices - Bitcoin News - November 28th, 2020
- Bitcoin's Carnivore Cult Is Both Stupid and Correct - CoinDesk - Coindesk - November 28th, 2020
- Ether, XRP and other 'altcoins' rally as bitcoin heads for all-time high - CNBC - November 28th, 2020
- Mike Novogratz: Everyone Should Put 2% to 3% of Their Net Worth in Bitcoin | News - Bitcoin News - November 28th, 2020
- Why Bitcoin price just hit $19,000 for the first time in 3 years - Cointelegraph - November 28th, 2020
- Will 'money printer go brrr' rob Bitcoin of its all-time high? - Cointelegraph - November 28th, 2020
- Why Is Bitcoin's Price Rising? Here Are a Few Possible Answers - CoinDesk - November 28th, 2020
- OKEx Sees Biggest Bitcoin Outflow in 8 Months After Resuming Withdrawals - CoinDesk - CoinDesk - November 28th, 2020
- Bitcoin faces this final resistance zone before $20K all-time high - Cointelegraph - November 28th, 2020
- EURST Stablecoin Reinvention of the European Economy | Sponsored - Bitcoin News - November 28th, 2020
- Bitcoin hopes of record value of over $20,000 dashed after cryptocurrency falls again - Sky News - November 28th, 2020
- Should you invest in Bitcoin and how to do it - Telegraph.co.uk - November 28th, 2020
- Russian Hospitalized After Bitcoin Mining Farm Sets Apartment on Fire - CoinDesk - CoinDesk - November 28th, 2020
- Researcher Publishes Never Before Seen Emails Between Satoshi Nakamoto and Hal Finney - Bitcoin News - November 28th, 2020
- OKExs Withdrawal Suspension Isnt Behind Bitcoins Rally: Analysts - CoinDesk - CoinDesk - November 28th, 2020
- Bitcoin now has a 7% chance of beating $20K highs in the next 2 months - Cointelegraph - October 23rd, 2020
- For the first time since 2018 Bitcoin balances on exchanges fell below 2.5M - Cointelegraph - October 23rd, 2020
- Bitcoin top signal from 2017 reappears, but heres why it may not matter this time - Cointelegraph - October 23rd, 2020
- First Mover: PayPal Rushes In and Bitcoin Breaches $12K, While USDC Gains on Tether - CoinDesk - CoinDesk - October 23rd, 2020
- Macro Investor Dan Tapiero on Crypto Adoption: Emerging Economies Ahead of Developed States | News - Bitcoin News - October 23rd, 2020
- Ban All Ransomware Payments, in Bitcoin or Otherwise - CoinDesk - CoinDesk - October 23rd, 2020
- Hotel Bitcoin ATMs on the Rise With Addition of Swiss Hotel Dolder Grand | News - Bitcoin News - October 23rd, 2020
- World Gold Council Survey Shows Cryptocurrency Investment the 5th Most Popular in Russia - Bitcoin News - October 23rd, 2020
- Ethereum Q3 Volume Dwarfs Bitcoin's, Fueled by DeFi - Decrypt - October 23rd, 2020
- Crypto fans rejoice: Bitcoin rallies to the brink of $12,000 - Aljazeera.com - October 23rd, 2020
- 187,000 BTC Drained: Over $2 Billion in Bitcoin Leave the Top Exchanges Since June | Exchanges - Bitcoin News - October 19th, 2020
- A Former Goldman Sachs Hedge Fund Chief Has Predicted Bitcoin Will Surge To $1 MillionHeres Why - Forbes - October 19th, 2020
- Bitcoin minings future is green, and Russia has the best chance - Cointelegraph - October 19th, 2020
- Has Bitcoin Finally Met Its Match? - Forbes - October 19th, 2020
- Bitcoin rips and cruise ships: Bad crypto news of the week - Cointelegraph - October 19th, 2020
- Where Does Bitcoin Fit in the Global Reserve Currency Game? - CoinDesk - Coindesk - October 19th, 2020
- Enormous wall of money will send Bitcoin to $1M in 2025 Raoul Pal - Cointelegraph - October 19th, 2020
- Bitcoin's Intrinsic Value: Crypto Community Responds to Bank of England Governor | News - Bitcoin News - October 19th, 2020
- Bitcoin Price Ready For a New Pop Will It Do It Today? - InvestingCube - October 19th, 2020
- 'Enormous Wall of Money' Coming Into Bitcoin, Price to Reach $1 Million in 5 Years, Says Raoul Pal - Bitcoin News - October 19th, 2020
- Bitcoin and Ripple's XRP - Weekly Technical Analysis October 19th, 2020 - FX Empire - October 19th, 2020
- Blockchain Bites: Bitcoin on Ethereum The Whos, Whats and Whys - CoinDesk - CoinDesk - October 19th, 2020
- First Mover: Privacy Is Litecoin's Ace in the Hole as JPMorgan Touts Bitcoin - CoinDesk - CoinDesk - October 19th, 2020
- Hathor Merge Mining Pool Commands 33% of the Bitcoin Cash Hashrate - Bitcoin News - October 19th, 2020
- Cashfusion Use Increased by 328%, $200M in BCH Fused and Close to 20,000 Fusions | Privacy - Bitcoin News - October 19th, 2020
- The Silk Road Balance Sheet Discrepancy: Bitcoin Worth $4.8 Billion Still Missing | Featured - Bitcoin News - October 19th, 2020
- Bitcoins Taproot is ready to go, but it's unlikely to be included in the next release - Cointelegraph - October 19th, 2020
- How will the US presidential election affect the price of Bitcoin? - Cointelegraph - October 11th, 2020
- $12K Bitcoin price back on the table after BTC rallies above $11.4K - Cointelegraph - October 11th, 2020
- Coinbase's 'Mission' Violates the Spirit of Bitcoin - CoinDesk - CoinDesk - October 11th, 2020
- Lyn Alden: Bitcoin Correlations Depend on What Phase It Is In - CoinDesk - CoinDesk - October 11th, 2020
- UK Bans Sale of Crypto Derivatives to Retail Investors from January 2021 | News - Bitcoin News - October 11th, 2020
- Yearn Finance Token Value Slides 67%, While Locked Value Loses Over $300M | Altcoins - Bitcoin News - October 11th, 2020
- Bitcoin price holds $10.5K but a $30M sell wall looms overhead - Cointelegraph - October 6th, 2020
- Bitcoin To Hit $100,000 in Five Years as Demand and Adoption Increase - Report | Markets and Prices - Bitcoin News - October 6th, 2020
- Trump, price dots and COVID-19: 5 things to watch in Bitcoin this week - Cointelegraph - October 6th, 2020
- $8M Worth of 'Sleeping' Bitcoin Rewards from 2010 Moved the Day Before 'Black Thursday' - Bitcoin News - October 6th, 2020
- Interest in Bitcoin Soars in Egypt Amid Economic Crisis and Unemployment | News - Bitcoin News - October 6th, 2020
- A Major Tesla Investor Has Predicted Bitcoin Will Be Worth More Than $1 Trillion In Under 10 Years - Forbes - October 6th, 2020
- Crypto for Congress: Bitcoin Sent to All Congress Members' Campaigns | News - Bitcoin News - October 6th, 2020