Time for the crypto carrot and not the stick?
The FCA is back and considering banning Cryptocurrency derivatives again. Which when offered to inexperienced investors on excessive margin rates are of course unsuitable for retail investors. The regulator concluded a consultation on the subject at the end of last week and is expected to publish its initial findings in 2020.
The major area of concern for the FCA seems to be the level of volatility within crypto-assets such as Bitcoin when compared to other asset classes. According to data from the Economist magazine, Bitcoin is four times as volatile as other physical commodities and if one looks at crypto-centric blogs and websites many of the headlines you’ll find there are about sharp price swings in various coins.
Where can you trade Cryptocurrency CFDs?
The crypto markets are generally full of scammers, and thieves. There are, however, decent CFD and spread betting brokers regulated by the FCA that offer crypto trading.
The FCA has a duty to look out for the welfare of retail and private investors and the regulator has calculated that this group, has on balance, lost around £371 million in these types of products during the eighteen months to end 2018.
That is undoubtedly a large sum but it is one that needs to be viewed in the context of the wider markets, for example, the same £371 million pounds of PnL would be generated by just a +/- 0.40% move in the price of oil major BP which currently has a market cap of £101 billion.
We are all for investor protection and crypto derivatives are clearly speculative instruments that are designed for trading and not a long-term investment.
Investing in crypto is like buying a massively out of the money option. You’ll probably lose all your money, but maybe, just maybe you’ll call it right and make multiple returns.
I remember one client ages ago, bought some options in a US small-cap after a newsletter recommendation for a few hundred dollars. He said he nearly had a heart attached when one of the guys on the desk called him up one afternoon to say they were worth about $400k.
I can’t remember if he got out and took the profit though.
But at the same time, Bitcoin traders thrive on volatility and if there are concerns about how these products are traded and who by, then perhaps the FCA should consider raising the bar for investor education and tightening up on the suitability and appropriateness tests that clients have to pass before they can open an account with an FCA regulated broker.
Leverage levels in cryptocurrency derivatives have already been sharply reduced by last year’s intervention into the FX and CFD markets by the super-regulator ESMA, which cut the gearing available to just two times.
CFDs avoid the risk of having your crypto nicked…
Also, let’s not forget that when retail clients trade a CFD or Contract for Difference on a cryptocurrency, with a regulated broker, they do not need to worry about the ownership and storage of the electronic assets, and they enjoy full FCA regulatory protections.
And that’s a big bonus because storing crypto assets securely is still a significant problem and one that even the biggest exchanges and crypto wallet providers have yet to resolve.
As much as a billion dollars’ worth of crypto assets were misappropriated in 2018 and many of the online crypto exchanges are unregulated, meaning that those clients have little chance ofredress.
However, it’s also emerged that the FCA is conducting an increasing number of investigations into the wider cryptocurrency ecosystem, the FT notes today that the FCA now has 87 ongoing investigations and that this figure is up by some +74% since last year.
Things may also be changing with the recent launch of a new physically settled Bitcoin futures contract by BAKKT and ICE (The Intercontinental Exchange) which claims to have effective and secure storage for crypto coins, a development which they believe is essential to encouraging institutional investors into this space.
For now, though, there is clearly ongoing interest and demand for crypto assets among investors and traders and rather than regulating this business out of the London markets entirely, where it can be properly scrutinised, and driving it offshore where it won’t be.
Perhaps the regulators could seize the initiative in this instance and try to attract more crypto trading businesses into the highly regarded regulatory environment that operates within the UK and its markets.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.