BlockChain & Cryptos | |
BlockChain & Cryptos | |
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Friday, December 15, 2017 /10:55AM / FDC
The
rapid price swings of crypto currencies are prompting volatility-starved
investors to examine ways to join the biggest speculative boom since the dotcom
fever.
The
best known, bitcoin, has in the space of 24 hours this week rallied to an
all-time high of $11,434 before sinking as much as 21% to $9,009, having only
touched $2,000 for the first time earlier in the year.
What
is a crypto currency?
Sometimes
known as coins, crypto currencies are a 21stcentury creation — a mixture of
digital assets, huge amounts of computing power and a network of servers on
which to store shared data.
Unlike
everyday money, they are decentralized — meaning they are not issued or guaranteed
by central banks and therefore fall outside the purview of regulators. The
currencies are secured against hacking by cryptography and can be converted
into real-world money anonymously. This has attracted some criminal elements, a
point emphasized by regulators and critics.
Apart
from bitcoin, other crypto currencies have risen dramatically this year,
including Ethereum, Ripple, Litecoin and Dash. They have different
characteristics, which allow users to treat them very differently. That, in turn,
partly underpins their appeal and valuations. Bitcoin sees itself as an
alternative to central bank currency, while Ethereum is “cryptofuel” that is
not to be used as a currency. Ripple, meanwhile, is a software aimed at
financial markets, such as foreign exchange.
Why
have prices rallied so dramatically?
A
mixture of scarcity, enthusiasm and — a big driver of such investor manias —
the fear of missing out. Many investors come from China, using Japanese
exchanges.
For
example, only a finite number of bitcoin — 21m — can be created. There are
16.7m in circulation, according to data from Canalysis, bringing bitcoin’s
market capitalization to about $167bn. Of those in circulation, about 37% have
been spent or traded in the past year, while about 22% are being held by
“strategic investors”, and most of the rest have been lost.
At
the same time, enthusiasts, semi institutional names and even some hedge funds
have sought to invest in crypto currency projects. Many have embraced so called
initial coin offerings, a fundraising mechanism. “We think a large part of the
potential value of Ethereum is its role as the money supply for ICO,” said Bank
of America Merrill Lynch in a research note this month.
The
surge in bitcoin’s price has prompted some of the world’s biggest market
infrastructure providers to explore ways for customers to trade the market
using more traditional investment instruments, such as futures or contracts for
difference.
Chicago
based exchanges CME Group and CBOE Global Markets are looking to list bitcoin
futures, a prospect that has helped lend legitimacy to bitcoin and fuel recent
price gains.
With
some marketing fanfare, spread betting and other online platforms have begun
offering crypto derivatives to allow punters to buy and sell the market.
What
are the risks associated with bitcoin?
As
comparisons abound with the Dutch tulip bubble of the 1600s, national
regulators have warned investors of the dangers surrounding a market that, to
date, has been unregulated, illiquid and prone to big swings in price that
severely limit its use as a currency for transactions.
“Bitcoins
are concentrated in very few hands, who owns a bitcoin is not clearly defined,
market manipulation is rife, and whether a transaction settles or not is
probabilistic, rather than legally certain and final,” said Preston Byrne, a
structured finance solicitor and founder of Monax, a blockchain software
company.
Higher
prices mean that holders of the currency — whether exchanges, trading platforms
or retail punters — are a more lucrative target for hackers. IG Group, the
world’s largest online trading platform, suspended trading of some of its
bitcoin derivatives on Monday, citing the growing security risk associated with
offering the products.
Like
all asset classes, exiting the market is a crucial factor. Some platforms and
exchanges take the risk of a trade on to their books and pay out customers from
their own funds, until they can sell the currency on the market. If a fraction
of customers sold, that could put a stress on the market intermediaries, which
do not have access to credit at banks.
And
there are significant real world problems. For example, the mining of bitcoins
this year has consumed more energy than the average electricity consumed
annually by 159 nations, according to Digiconomist.
Can
crypto currencies enter the mainstream of finance?
Bulls
argue that once price stability has been achieved, bitcoin could feasibly be
used as a currency to denominate a transaction, rather than just for
speculative gains.
“The
infrastructure is coming in to deal with [this shift],” said Gavin Brown,
senior lecturer in financial economics at Manchester Metropolitan University
and director of crypto currency hedge fund Block chain Capital. The process
could take between 10 and 15 years, he said, adding that a “regulatory light
touch approval” would be a necessary part of this development.
But
critics warn bitcoin cannot be used as a medium of exchange or store of value
in the manner of central bank backed money.
Tara
Waters, a Fintech lawyer at Ashurst, said: “Central banks may decide to adopt
such technologies themselves, although it is likely they would adapt the
technology to better fit existing systems and norms.”
Others
fear the bubble could burst, causing upheaval to those involved in the market.
“I
don’t think bitcoin has any business in the mainstream financial system,” said
Mr. Byrne. “I am hearing anecdotal stories of people maxing out credit cards
and remortgaging their homes to buy bitcoin. Banks looking at it now should
mainly be focused on limiting their exposure.”
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