Why do people own crypto?

It’s an interesting question. Back at the beginning, when Bitcoin emerged,for some  the interest in crypto was partly a way of flipping the bird at the big banks and governments that had let the 2008 financial crash to happen, while for others the technology drew them in. But where are we at now in terms of sentiment?

A Coindesk opinion piece by Raphael Auer and David Tercero-Lucas starts by suggesting that at a time when cryptocurrencies’ market capitalizations are returning to all-time highs, it’s a good time to examine investor views, characteristics and sophistication. They ask, “Are cryptocurrencies sought out of distrust in fiat currencies or regulated finance? And who invests in cryptocurrencies?”

According to data from the “Survey of Consumer Payment Choice” (SCPC), a dataset that is representative for the U.S. population and spans the period from 2014 to 2019, the Coindesk authors say “there is no evidence to support the hypothesis that cryptocurrencies are sought as an alternative to fiat currencies or regulated finance in the U.S.” Nor do cryptocurrency investors have heightened concerns about the security of mainstream payment options, such as cash or commercial banking services.

Education level is a pointer to crypto ownership

What the research does show is that cryptocurrency is a niche market dominated by young, male, educated investors: “In fact, one of the main socioeconomic determinants of U.S. cryptocurrency investors is educational attainment.” Also, if you’re young, you’re more likely to own at least one cryptocurrency.

The pandemic effect

The pandemic appears to have been a factor in demand for crypto, and might the “recent crypto hype might have changed the composition of investors,” they ask. The “Survey of Consumer Payment Choice” for the year 2020 indicates that the pool of investors was much wider in 2020 than in 2019, and that almost 4% of U.S. citizens own at least one cryptocurrency in comparison with the 1.9% of the previous year. There is also an upward trend in the number of people who know about cryptocurrencies (more than 72% in 2020). Furthermore, the survey shows that crypto owners are less of a ‘niche group’ now, and are a better reflection of the general population. For example, more of the less educated people adopted crypto in 2020 than in 2019. The average age of cryptocurrency investors has also increased, with more of what might be considered “standard” investors becoming interested in this asset class.

Taking all this into account, it would seem that crypto ownership is not related to any growing distrust in today’s regulated financial markets. Nor are they bought as an alternative to fiat currencies or regulated finance. The main drive to buy appears to be their value as a speculation asset. “From a policy perspective, if the objectives of investors are the same as those for other asset classes, so should be the regulation,” the authors say, pointing out that as crypto goes more mainstream and investors better reflect the general population, then “a clarifying regulatory and supervisory framework for cryptocurrency markets may be beneficial for the industry in a context where cryptocurrencies are being targeted by less-educated investors and adoption is becoming widespread.”

Analysts urge caution as Bitcoin ETF launches

Today, the 19th October, is the launch of ProShare’s Bitcoin Futures Exchange Traded Fund (ETF) on the NYSE. The company confirmed this on Monday with the SEC, which had given the go ahead a few days before. The fund is linked to bitcoin futures that are traded on the Chicago Mercantile Exchange.

ProShares was among a number of bitcoin ETFs considered by the SEC, with its Chairman Gary Gensler making it clear that funds linked to the futures market rather than the underlying asset were more likely to win regulatory approval.

News of long-awaited approval for a bitcoin-related ETF sent the world’s largest crypto by market value to levels not seen since April. Bitcoin rose above $60,000 for the first time in nearly six months on Friday, following the announcement, and it is hoped that the ETF launch will “open the floodgates to a stream of similar products winning regulatory approval and accelerating the flow of investments into crypto.”

Some analysts are talking up Bitcoin to reach $100,000 on the back of this, but others believe it will cause a sharp, short-term pullback, with some warning that the event could be another “buy the rumour, sell the news” event. It is also widely believed that additional ETFs will rollout over the coming week.

At the moment, bulls are busy defending the market against the bears, who are trying to pull the price back below $60,000. So far, the bulls are holding their ground in the $61,000-$62,000 zone.

Jordan Finneseth, writing for Cointelegraph, says: “According to some price path charts, there’s a chance that Bitcoin tops out below $68,000 in the next few months before heading lower to establish a higher low near $46,000.”

David Lifchitz, managing partner and chief investment officer at ExoAlpha suggests that a “small pullback might be in order,” but added that “the medium-term looks definitely higher.” However, he urges caution for ETF buyers, saying, “these Bitcoin ETFs based on CME futures to track BTC price will underperform Bitcoin spot price due to ongoing futures roll costs.”

Lifchitz also suggests that while ETFs are supposed to open up Bitcoin investing to more retail investors, it will in fact be the experienced traders who will benefit most. He said, So these ETFs will likely be an easy Bitcoin access to unsophisticated retail investors with their broker accounts, who will not get the full return of BTC after all fees are accounted for. These ETFs will also bring arbitrage opportunities for smart traders. Wall Street at its best.”

But there is good news for existing Bitcoin owners. One analyst suggested that BTC price has the potential to drop back to the $53,000 support in the near term before resuming its uptrend, and that uptrend could take it to $98,000.

Crypto threatens financial stability says BoE banker

Jon Cunliffe, the Bank of England’s deputy governor for financial stability has recently given a speech where he tackled the question of whether or not, “the world of ‘crypto finance’ poses risks to financial stability.” Why and how does it do that?

Cunliffe pointed out that cryptoassets have grown by roughly 200% in 2021 ($2.3 tn), and from $16 billion just five years ago. The global financial system is worth $250 trillion, to give some context. He also mentioned that the sub-prime debt market was worth around $1.2 trillion in 2008, just before the financial crisis.

His point in using this comparison was that because the crypto industry is growing rapidly and beginning to connect to the traditional financial system, and there are leveraged players emerging in a mostly unregulated space, systemic risks, while limited now, could grow very quickly.

Referring back to 2008, he reminded his audience that in the case of the sub-prime market, “the knock-on effects of a price collapse in a relatively small market was amplified and reverberated through an un-resilient financial system causing huge and persistent economic damage.” We all remember the effects.

He called for financial stability regulators to take notice, to think very carefully about what could happen and whether they, or other regulatory authorities, needed to act. However, he cautioned against over-reaction. As he said, “We should not classify new approaches as ‘dangerous’ simply because they are different.”

Indeed, he said that innovation and technology, plus new players, could tackle longstanding frictions and inefficiencies and reduce barriers to entry, and that in the past they have been key to driving improvement and to increasing resilience in financial services.

Then, what started as a speech that may have sounded gloomy to the crypto markets, Cunliffe made an important and positive statement. He said, “Crypto technologies offer a prospect of radical improvements in financial services.” But he did add a caveat, “However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons.”

He then analysed the crypto market, breaking it down into unbacked cryptoassets used primarily as speculative investments and backed cryptoassets intended for use as a means of payment, pointing out that unbacked assets make up 95% of the market, and includes Bitcoin. His concern is that the main use of unbacked cryptoassets is for speculative investment and that fewer holders now say they see them as a gamble and more see them as an alternative or complement to mainstream investment. His greatest fear appears to be that while he doesn’t believe a collapse in the crypto retail investor sector would bring about instability, the large financial institutions with exposure to crypto are another matter, such as the many crypto hedge funds. He described one scenario: “For example, a severe fall in the value of cryptoassets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.”

Ultimately, Cunliffe called for faster action on regulating the market to manage risk, saying, “Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance.”

While he sounds positive, as ever the demand is to bring crypto more in line with traditional finance, the very thing that caused the creation of crypto in the first place, due to ‘tradition’s’ failings.

Neobanks are challenging the big crypto exchanges

As neobanks like N26 and Revolut, as well as payment providers such as PayPal, Square and CashApp move into cryptocurrencies, does this pose a threat to the cryptocurrency exchanges?

Investing has changed, according to Francis Bignell at Fintech Times. He says, “Due to the pandemic, younger, tech savvy individuals working from home, spending more time online, and flush with stimulus money found solace in investing,” and adds, “As a generation known for not accepting things as they are, simply because it’s how they’ve always been, they relentlessly refused to approach investing in the “traditional way.” 

What we now have is a rising class of retail investors who value investments by the social currency and utility (e.g. meme stocks, NFTs and crypto). The result of these trends raises a number of questions about the future of investing. 

Bignell points out: “In early 2021, Reddit users battled with Wall Street by skyrocketing GameStop’s stock share. This, along with the rise in meme stocks, show that Wall Street is no longer dictating what is worth investing in and what isn’t anymore.” You could say a new approach to valuation is rising, one that’s based on the social worth of a company versus traditional notions of profitability.

Crypto exchanges challenged by new investing environment

Public.com is an evolving investment platform. It will shortly support trades in bitcoin, bitcoin cash, ether, ethereum classic, dogecoin, litecoin, stellar, zcash, cardano and dash, and is being tailored to a growing, young demographic looking to trade in meme stocks. Public offers zero-commission stock trading and has an added social media component that could leverage the emerging meme stock-fuelled retail investment frenzy, as exemplified by Shiba Inu’s 24,459,593.97% rise in the last year, and Dogecoin’s 8,765.17% increase in value.

Robinhood is also about to challenge the crypto exchanges by introducing crypto wallets for its users to trade with other wallets. Robinhood users had previously been able to buy and sell a few cryptocurrencies, but had been unable to send those coins to external wallets or receive them from elsewhere. When this is implemented, it will offer Robinhood access to the space dominated by Coinbase and others.

US based fintech, MoneyLion, has announced it is adding crypto trading to its all-in-one financial services app, joining the ranks of N26 and Volt. It will introduce buying and selling capabilities for bitcoin and ether, according to its CEO, Dee Choubey. Choubey told CNBC, ““It’s a very important first step if we think that the future of fintech is DeFi. We will have created a segment of the population and have exposed them to DeFi, so when it becomes more ubiquitous, they’re fully prepared to take advantage of it.”

Maurizio Raffone Chief Financial Officer at Credify Pte. Ltd, explained how investing in a neobank would differ from a crypto exchange: “Neobanks’ typical client may not be a savvy crypto investor but is interested in having some exposure to the asset class and may not be bothered about NFTs, altcoins or stablecoins and so just having some degree of exposure to BTC or ETH would suffice. On the other hand, crypto exchanges do not really focus on providing any traditional financial service support but do generally provide a greater investment choice and with more sophisticated investment techniques.” 

What does that mean for banking and financial institutions? It means that they must have some form of crypto or digital currency feature or be left behind as their customers become more digitally aware.