Who’s propping up the Bitcoin market?
That’s a good question although the answer would appear to be something that approximates “everyone” (because who doesn’t want an “asset” that only goes up, right?). And when you start drilling down into the anecdotal evidence, the cast of characters is the very definition of absurd. Take the WSJ feature piece out late last month that included the following highly amusing “tales from the crypto”:
Rita Scott’s grandson convinced her in mid-November to get in on the latest investing sensation and buy bitcoin. “I thought it was a big coin,” the 70-year-old said. “I didn’t even know what it was, a piece of coin? Why would I invest in a piece of coin?”
With a few hundred dollars of her money invested in it, Ms. Scott quickly caught on and started checking the price several times a day, even while playing poker at a casino in her hometown of Las Vegas.
[…]
Paul Joseph Spelce, a 22-year-old graduate student in New York, was one of the newcomers who bought in. Over Thanksgiving dinner with friends last week, the conversation was dominated by talk of bitcoin. “Even this woman who didn’t have a computer at home couldn’t stop talking about how bitcoin was going to reach $10,000 soon,” Mr. Spelce said.
Nothing could go wrong there. Nothing at all.
Just like nothing could go wrong when commodities traders, overcome by nostalgia for yesteryear, decide to take up endowments and foundations on their offer to throw money at desperate oil volatility traders who think they can reclaim lost glory by wading into Bitcoin. Here’s what I had to say about that on Wednesday:
Forgive me, but I’m not sure past performance in traditional commodities is a guarantee of future results in Bitcoin. If these swashbucklers thought commodities were exciting, just wait until they find themselves trading against someone’s Dewar’s-guzzling, chain-smoking grandma who’s placing orders on Coinbase while shrieking “hit me” to the blackjack dealer. Or against a Millennial who’s literally gambling his student loan disbursements on GDAX at 3 in the morning while doing a keg stand.
Well as you know, a big part of the demand for Bitcoin emanates from Asia, which isn’t exactly surprising. And on Thursday, Deutsche Bank is pretty sure they’ve figured out who is “propping up” the market. To wit, from a new note:
An 11 December Nikkei report stated that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. Japanese traders have reportedly come to account for nearly half of cryptocurrency trading since China started to shut down cryptocurrency exchanges, and this is said to be widely known among industry insiders (various estimates exist). This report shows that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.
There you go. It’s Mrs. Watanabe. Or in this case, “Mr.” Watanabe. Here’s Deutsche Again:
We think that retail investors are shifting from leveraged FX trading to leveraged cryptocurrency trading. Japan accounts for a high 54% of global foreign exchange margin trading (leveraged FX trading), so Japanese retail investors are major players in FX markets. Data from GMO Click Securities indicates that men hold 79% of FX trading accounts, and 63% of these men are aged 30-49 (Figures 3-4).
Of course the question there is the same as it was with Chinese housewives who turned into leveraged day traders on the Shenzhen during China’s equity “miracle” in early 2015. Namely: do these people know what the hell they’re doing? Unsurprisingly, the answer is: “probably not.” To wit:
According to a survey by the Central Council for Financial Services Information (the Bank of Japan), Japanese retail investors are less financially literate than their US peers across all age groups (Figure 6). Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors (Figure 7).
Furthermore, Deutsche notes that for leveraged cryptocurrency services in Japan, some brokers are using the same 25X leverage limit that they use for normal FX trading “but there are no direct rules in leveraged trading of cryptocurrency.” Basically, this sets the stage for brokers to end up on the hook if retail investors end up screwing the proverbial pooch. “Authentication of Bitcoin settlements takes at least 10 minutes,” Deutsche notes, before concluding that “the risk of incurring losses greater than margin is higher than in normal FX trading, due to high intraday volatility [and] as a result, we believe that brokers also face a higher risk of failure.”
Right. But no one should worry about this, because as Donald Trump (in)famously put it before his much ballyhooed romp through Asia, Japan is a “nation of Samurai warriors.”
So they should be well suited to handle anything the crypto market throws at them.
