The Financial Conduct Authority of the United Kingdom has deemed Bitcoin derivatives buying from retail investors as too risky, based on its volatility and seeks to issue blanket ban on all such trading in the future.
While Bitcoin is making great headway in the world, when it comes to trade, security, and other topics, the UK has turned its attention to crypto-derivatives, such as options, futures trading, and exchange-traded notes (ETNs). The regulator seems to be dissatisfied with the level of risk that these volatile investments pose to retail investors.
✓BTC Futures 101
Futures contracts are an agreement to buy or sell assets (Bitcoin in this case) on a specific date for a specific price. The agreement must hold up, despite the market price of the asset at the time of the maturity of the contract in place.
Massive sums of money are traded on a yearly basis via crypto-derivative products, such as Futures Contracts, with more than $23 billion traded so far in 2019, according to data analysed by the research firm, Chainalysis.
Investors usually enter into such contracts to try and benefit from a potential upturn in the value of Bitcoin in the future. It’s a guessing game that is usually based on promising economic forecasting with traditional assets. While stable assets often offer a viable market place for this type of trading, Futures trading on Bitcoin and cryptocurrency is far riskier.
✓Stormy forecast: The Only Sure Thing In Crypto
Like any big storm, Bitcoin is volatile, and nobody really knows how the market will react from one day to another. The attitudes of investors could cause the market to rise and fall in a heartbeat. The 24th of September is a clear example of this, where the market value of Bitcoin fell by $1,000 per coin in half an hour. Consider for a moment what this would have done for futures coming to maturity at this time. While sellers would have been lucky to hedge against losses on this day, buyers would have lost massive amounts of money as a result.
Because of the decline in value, certain long term Bitcoin derivatives contract exchanges asked for contract holders to add extra collateral. This lead to an unexpected reaction from buyers, who in turn liquidated $634 million worth of Bitcoin contracts on the Bitmex platform alone.
This sort of climate has led the FCA to review the crypto derivatives trading, with the chance of a proposed ban on selling any type of crypto-derivative to retail investors. The watchdog want to ensure that the general public, who are often not quite clear on what they are buying into, are kept safe in this regard, while businesses may continue to trade in this fashion.
✓Only Time Will Tell
Should the UK uphold their scrutiny and ban futures trading on crypto for the man in the street, then they will join a list of countries who have also seen fit to regulate this market, including: Japan, Hong Kong (China), and other nations in Europe.
As Bitcoin becomes a more popular currency, it is only within the interests of the public that all practices are on the platform are taken to heart and regulated properly, to safeguard all parties involved. A decision will be made by early 2020.
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