The Regulator Strikes Back

The Regulator Strikes Back

Disclaimer: Your capital is at risk. This is not investment advice.

ByteTree Market Health Update; Issue 46

The regulators and their friends in law enforcement have been busy in the crypto space. The big news from the US were the charges brought against the Seychelles-based Bitcoin exchange, BitMex. Having (allegedly) allowed US citizens to use the BitMex platform, they have been accused of failing to comply with the Banks Secrecy Act. Bitmex is still operating but I gather the best part of a billion dollars has left the platform.

Then John McAfee, the software entrepreneur and general crypto reprobate, has been arrested by the Spanish Police for tax evasion, and is awaiting extradition to the US. He has been active in the crypto space, promoting various schemes. We’ll miss him on Twitter.

Then the big news came here in the UK from the regulator, the Financial Conduct Authority (FCA), which released its long-awaited rules on crypto regulation for retail investors.

The FCA has not “banned crypto”, but they have put several obstacles in front of crypto derivative products. These include banning the sale of exchange traded products (ETFs but not quite), contracts for a difference (CFDs), futures and options to retail investors. Note that the FCA has not banned derivative crypto products, crypto ownership, or trading, but the promotion of these products to retail investors. Hence, institutions can still buy them. These new rules come into effect on 6th January 2021.

I had assumed that the European Union (EU) would be more restrictive with crypto policy and the UK would ease up. Not so it seems. There are several crypto exchange traded products trading in Sweden, Germany, and Switzerland. UK investors can continue to own these products but will no longer be able to buy them from next year.

The FCA’s objective is to “protect” the retail investor. You can imagine how many complaints they would have had from the crypto space in recent years. It has been full of comedy, tragedy, and adventure. While there have been plenty of scams, I imagine most people that lost money did so because they got greedy.

They say crypto has “no reliable basis for valuation”, with the implication that anyone who buys them, does so on blind faith, presumably with a healthy dose of stupidity. I strongly disagree with this patronising and frankly offensive view. Crypto has indeed attracted the bad apples, but it has also attracted the pioneers. And if you want to value Bitcoin, then look at the fair value we publish on ByteTree. For Bitcoin, that is currently $8,171 against a price of $10,612. I would say it is more reliable than anything I have seen to value the FTSE 100.

Most assets are valued by their future cashflows, yet ultra-low rates have distorted that. Bonds and blue-chip equities, once deemed to be safe investments, are now dangerous thanks to high valuations. The discount rate is too low, which has driven asset prices beyond reason, thanks to the build-up of debt in the financial system. There are many reasons why crypto has taken off, and shelter from the old world is certainly one of them.

Yet the trend remains stable

In years past, this recent anti-crypto legal and regulatory onslaught would have sent prices into a nosedive; quite possibly 10% for each incident. But this time the market has taken the news in its stride. That’s incredible when you think about it, especially when these agencies appear to be operating in concert (or just a coincidence?), presumably to inflict maximum damage. The resilience is proof that the network has matured a great deal, and value buyers are emerging that buy the dips.

Bitcoin is in its 11th year. These crypto products (ETPs and CFDs) have been allowed for five years or more, and they have done what they said they would do. If they are so bad, then why have they been allowed for so long? I would love to know the real reason.

ByteTree and Bitstamp

ByteTree has released a Bitcoin report that has been sponsored by Bitstamp. It gives a comprehensive overview of the space and we hope you like it. Download the report here.

Network Demand Model

The score has dropped to a 3 out of 6, with velocity, MRI, and short-term spend bearish. MRI turned negative last night. When MRI is negative, the Bitcoin price has tended not to rise. That said, I wouldn’t recommend using it as a short-sell signal either. Other than the short-term network, the remaining indicators are strong with fees rising rapidly.

But if the network drops to a 2, it will be time to sell. The one thing that is slow is network velocity, but this is unlikely to cause a price collapse when fees are rising as that shows transactions are in demand.

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