Brokerages offering unrestricted Bitcoin trading are suffering tremendous losses which in some cases have caused large firms to stop paying their affiliates. The sooner this ‘crypto mania’ is over, the better for everyone, brokers, providers and traders alike.
Since the semi-pathological obsession with crypto currency engulfed the lower echelons of the digital marketing and affiliate lead selling entities that litter the back streets of Ramat Gan and Limassol, FinanceFeeds has held a solid opinion that the vast majority of crypto currency-related schemes are exactly that – schemes.
It is clear and well recognized among the right and proper leaders of the genuine electronic trading industry in its major centers of London, New York, Sydney and Chicago that pseudo-venture capital in the form of Initial Coin Offerings is quite simply a vehicle for fraud, and those peddling it are in many cases the same low level semi-literate confidence tricksters that operated binary options platforms for 10 years.
FinanceFeeds has made its stance clear on these matters from the outset of the rise to media prominence of this absurdity, and, along with the vast majority of long established companies, stands by it.
Hence, anything ‘crypto’ related in terms of marketing, or funding for a banal project that will never come to fruition, is as absurd as Icarus’ attempt to fly toward the sun.
The same can be said of blockchain technology development. Many inexperienced mavericks are now touting blockchain development as a means of raising capital, citing investments from very large institutions such as Goldman Sachs and PriceWaterhouseCoopers as reference points, when the reality is that, if they were to conduct a bit of research within those organizations (I spent 18 years of my 27 year career in electronic trading technology as a system developer within Tier 1 interbank electronic trading desks) they would soon realize that actually the R&D is not for blockchain, but for the development of proprietary distributed ledger technology to create transparency and automate certain administrative procedures relating to financial transactions.
This means that in no way do any banks have it in mind to use blockchain technology as a facilitator of distributed ledger technology, as it is inseparable from Bitcoin, which is why the banks will develop their own, free from any crypto currency element which is superfluous to its functionality.
Those touting the incorrect rationale that blockchain development is the subject of massive venture capital investment have contributed to the artificially high value of Bitcoin. Once the banks launch their own distributed ledger, and the realization sets in that the millions were invested in developing in house distributed ledger, not in furthering Bitcoin technology, it will be a case of watching Bitcoin’s value plummet at the rate of an iron girder from a precipice.
Therein lies part of the risk. Far too much cryptobabble and lack of transparency, over inflated values, insidious fraudsters touting absurd ICOs and a complete lack of any method of clearing or pricing the actual Bitcoin itself as an asset.
The Securities and Exchange Commission (SEC) views Bitcoin, and other unbacked peer to peer digital currencies as commodities, and indeed this is a viewpoint that FinanceFeeds agrees with.
The downside is that it may well be a commodity by definition, but unlike other commodities, it has no central issuer, and no raw material value to maintain its stability, or even more important, to stop its miners and exchange operators from stealing from e-wallets, or simply packing up and running away, circumstances that we have all seen before.
FinanceFeeds has received documentation that demonstrates substantial losses sustained by the few retail brokerages that have allowed unrestricted cryptocurrency trading on their platforms, 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.
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 has now 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, is now unable to pay its affiliates and is thus withholding said payments.
What is really unacceptable is the lack of reporting transparency in this case, and the regulatory authorities’ wrong direction when addressing risk.
Yesterday, some of the most widely renowned brokerages in the world had to respond to FCA and ESMA guidelines relating to CFDs. British firms have been successfully providing CFDs to loyal and sensible British customers for decades, without problems of any kind, yet are subject to absurd and misguided regulatory wrangling.
FinanceFeeds today spoke to an actuary in London who is very close to this matter, who explained
“The majority of retail clients want to buy so in this case, the market makers are short with no real legitimate route to hedge. It is currently unclear if the exchange offerings from CBOE and CME Group can alleviate that issue.”
Yesterday, CME Group listed its first exchange traded Bitcoin futures contract under the BTCF8 symbol for January expiry. With a centralized exchange, clearing is possible as the exchange members all have to pay clearing fees.
Yet, firms offering risky fake currency and allowing themselves to be plunged into financial insecurity whilst providing a platform for their clients to lose more than just their shirt are free to do as they please, including list their stock on stock exchanges and have it go up by 5% when a massive unknown hole has been blown in its balance sheet, leaving the good quality firms that are doing it properly to carry share price decrements as a result of a completely misguided regulatory stance.
As it has been from the outset, FinanceFeeds maintains that ICOs, crypto platforms and any connotation relating to the world of over-hyped marketing-led digital currency should be avoided. It is the road to ruin for broker and client.
In terms of opinion, we would strongly advise not to enter into ICO schemes, or crypto-startups of any kind. Yes, Bitcoin may well be a commodity, however there is a huge difference between a properly managed, compliant FX firm in Britain, Australia or America, to a startup touting false tokens in a non-existent scheme to raise capital for a non-existent pipe dream, which when all is over and the money has been stolen, will reduce Bitcoin values to a point at which anyone trading them, broker or client, will catch a very severe cold.
If you as a retail broker want to take the word of a professional for it, simply make a call to one of the few genuine prime of prime brokerages, and see if you can get a liquidity channel for Bitcoin. Not a price feed, an actual liquidity channel where trades can be cleared at prime of prime level. The answer will be no.
FinanceFeeds reached out to senior executives at the firm concerned, and no response was provided.