Crypto market is absolutely irrelevant to the global financial world. Academics highlight its cult-like nature

Dr Daniele Bianchi of Warwick Business School has generated an incisive report, deducing that financial markets activity has nothing to do with cryptocurrency prices. We examine how Dr Bianchi’s report is absolutely imperative to anyone wanting to offer cryptocurrency trading

Even though digital currencies, especially Bitcoin, have been in existence for a decade already, the foaming at the mouth over-enthusiasm for placing the crypto prefix onto every single word uttered or printed that has been displayed by its almost fanatical followers is a relatively recent phenomenon.

Not only is it very recent but the sweeping proliferation of crypto-everything piled up higher than the Hoover Dam on a cyberspace that had never seen such a wave of hype since its very own inauguration in the early 1990s.

As with most hyperbole, those championing the cryptocurrency cause are not necessarily seasoned and experienced financial technologists with several years of career that includes Goldman Sachs internships, a degree from an Ivy League institution, a three year graduate management program at PriceWaterhouseCoopers and then a senior executive position at Equinix or BT Radianz before going solo to becoming a Solutions Architect at one of the Tier 1 banks or listed derivatives venue.

Far from it. Most are unknown entities that have latched onto a craze and become completely engrossed in it, such that within just six months they have gone from being an armchair pundit with little experience to an out and out expert in the ‘future of the financial world’, with no previous experience, and a hostile reaction toward anyone who criticizes their adherence to this all-encompassing ideology.

That is fanaticism, and fanaticism and global economics do not bode well. Fanaticism and technology do not make for good partners, either.

FinanceFeeds has long been skeptical of the rush toward crypto-everything that has made itself omnipresent, and today a panel of academics have provided the results of their study which gives more weight to the conservative viewpoing with regard to cryptocurrency and how it affects the market, and even more importantly, which market factors affect its own price.

Every professional in the financial sector has witnessed vast and outlandish price changes to Bitcoin and its more recent bedfellows, however nobody really took that seriously as it was always viewed by the establishment as a fraternity activity. A folly. A technologically advanced means of giving mavericks and anarchists a platform to vent their anti-bank bile toward impressionable “occupy” students.

Dr Daniele Bianchi, Warwick Business School

The academic institutions with their fingers on the pulse are in a different position however. Far from joining sub-culture groups and waving anarchic flags outside the very financial institutions which empowered their parents generation to pay for the college fees that they now abuse, the academics in respected institutions are taking the cryptocurrency phenomenon and its effects on the market (and vice versa) as a subject for study and analysis.

In Britain, Warwick University’s business school has deduced that the value of cryptocurrency is not driven by any specific economic factors whatsoever, but instead purely by the mood of investors.

Given the over-enthusiastic one-track-mind mentality of most cryptocurrency proponents, if this study is correct (I tend to agree with it – Ed), then it would explain the absolute danger of brokerages offering it to retail traders.

Cryptocurrencies like bitcoin have been criticised in the past for their volatile price changes and unpredictable value patterns and, since the currencies are not linked to any national economy, the source of their value has been hard to understand.

In the new study “Cryptocurrencies as an Asset Class? An Empirical Assessment” the author Daniele Bianchi, Assistant Professor of Finance at Warwick Business Schoo concluded that the sentiment of the investors was what determined the digital currencies’ value.

Dr Bianchi , in his position as Assistant Professor in the Finance Group at the Warwick Business School, University of Warwick (that he joined in the Fall of 2014), is indeed qualified to oversee such research. He was awarded a Ph.D. by the Department of Finance at Bocconi University in Spring 2014. His research interests span empirical asset pricing, Bayesian econometrics, commodity markets, and cryptocurrencies.

His papers have been presented at conferences organized by the American Economic Association (AEA), the National Bureau of Economic Research (NBER), the Econometric Society, the European Finance Association (EFA), the European Economic Association (EEA), the Society of Financial Studies (SFS), and the Society of Economic Dynamics (SED). His publications include the Journal of Econometrics, the Journal of Business and Economic Statistics, and the Journal of Financial Econometrics.

It is believed that cryptocurrencies could potentially disrupt financial services and central banks, therefore posing a risk for the stability of prices and the financial system.”

The study continued: “Just as the value of a US dollar investment fluctuates based on countless factors such as national interest rates, trade deficit with other countries and government policy, cryptocurrencies trade at prices which are based on the perceived value of the platforms and projects they are associated with.”

Dr Bianchi observed “However, whatever you might think of cryptocurrencies, the picture that emerged looking at the past month valuations is rather interesting and might give some different perspective. The biggest loser is certainly Bitcoin (BTC), which went from $19k to $11k over the last month only.”

“However, although the big drop happened of the last few days, altcoins such as Ethereum (ETH), Ripple (XRP), Cardano (ADA), and Neo (NEO), are still up in their prices with respect to a month ago. In fact, while ETH still gained about 200$ from its initial month price, XRP and NEO have both almost doubled their value in a month. This holds despite factoring the recent drop” he said.

“There is one simple lesson here which we should not forget. The cryptocurrency market is still in its infancy. High volatility and even higher uncertainty in growth prospects are the norm. The very niche nature of the cryptocurrency market inevitably makes prices heavily influenced by demand pressure, which in turn is fueled by how much cryptos are perceived as an actual investment and legitimate concerns about safety and frauds. In this respect, from a purely agnostic point of view, large fluctuations in traded volumes and prices should not come too much as a surprise” he concluded when commenting on his research.

Indeed, many brokerages that have offered cryptocurrency trading have caught a cold.

In December, FinanceFeeds reported that having investigated this matter in great detail within the retail FX brokerage sector, a few retail brokerages that have allowed unrestricted cryptocurrency trading on their platforms had sustained losses into the tens of millions, and unlike losses sustained by firms that transfer their orders to liquidity providers and become exposed to negative client balances in the case of extreme and unpredictable market volatility, as per the Swiss National Bank’s removal of the EURCHF peg in January 2015, these are losses sustained by categorically ‘b-book’ brokerages which internalize their trades and specifically firms doing ‘actuals’ rather than CFDs.

There is no way to price or clear Bitcoin trades. No liquidity provider or prime brokerage will entertain it, as it is not a centrally issued currency, and Tier 1 banks only deal in centrally issued currency when extending counterparty credit to FX brokerages, hence its status as a commodity.

In one case, a well known retail brokerage which has a less than clean copybook in terms of due diligence when onboarding clients via its very unorthodox methodology in the United Kingdom has, according to documentation submitted to FinanceFeeds, lost approximately $40 million as a result of allowing Bitcoin trading on its retail platform.

The firm concerned immediately implemented a 20 minute maximum trading window for Bitcoin, meaning that the broker will automatically close trades after 20 minutes on all Bitcoin related activity. This is almost like a long binary option, however based on a currency which does not exist, and a commodity that cannot be delivered nor demonstrate physical value.

This particular broker, according to a number of its strategic partners, had been unable to pay its affiliates and thus was withholding said payments however when its end of year report was released, it simply swallowed the loss and spread it over the year to show a profit, hence very few shareholders or customers would have noticed.

What is really unacceptable is the lack of reporting transparency in this case, and the regulatory authorities’ wrong direction when addressing risk.

If Dr Daniele is right, then those with an overtly cult-like approach could take heed that like everything, especially when in its infancy, there are two sides to every (bit)coin.

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