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Investors urged to exercise caution after bitcoin price swings

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Finance experts have urged retail investors to take care when buying into bitcoin after the UK regulator this week warned savers of the risks of putting money into volatile cryptocurrencies.

The Financial Conduct Authority cautioned that the market for cryptoassets offered little protection for consumers and firms offering them often overstated the rewards and downplayed the risks.

The value of bitcoin has more than tripled since October, and valuations surged past $40,000 before falling in a weekend sell-off as investors dumped holdings. On Monday alone, cryptocurrencies lost more than $150bn in value, according to data from Coin Metrics. By Thursday, bitcoin had recovered much of the lost ground, trading at over $39,000.

Laith Khalaf, a financial analyst at investment broker AJ Bell, said: “Anyone who invests in cryptocurrencies should be prepared to lose their shirt, or a considerable portion of it . . . The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to bitcoin, in the mistaken belief it’s much the same.”

Susannah Streeter, an analyst at investment platform Hargreaves Lansdown, said: “Bitcoin’s price is being driven primarily by future price speculation. The FCA clearly believes the crypto Wild West could be running out of control, and is warning that consumers risk losing all their money if they succumb to promises of fast and high returns.”

Bitcoin is nonetheless increasingly seen as a tool for diversifying portfolios and a hedge against currency devaluation and frothy equity markets.

“Fears around devaluation of the dollar and the chance of inflation eating away at the dollar mean you’re seeing people come in and put up to 5 per cent of [their] portfolio into this asset class,” said Matt Blom, global head of sales trading at cryptocurrency trading platform Diginex. “There are a lot of investors placing money in this space who weren’t here in 2017.”

Five bitcoin-centric exchange traded funds (ETFs) have launched since the start of 2019, pointing to a marked increase in appetite among retail investors. In December more than $121m flowed into bitcoin and cryptocurrency ETFs, and global assets under management in these funds more than doubled from October, to more than $3bn, according to TrackInsight, an ETF data provider.

But larger-scale investments have also become more commonplace, suggesting greater institutional involvement. Purchases of bitcoin by “wallets” holding more than 1,000 coins, or stakes worth approximately $35m at recent prices, have spiked as the price of bitcoin tumbled from last week’s highs.

In 2017, fewer than 1,600 people or institutions held more than 1,000 bitcoin. This week, more than 2,400 held stakes of equivalent or greater size, according to data from the cryptocurrency data tracker Glassnode.

The Ruffer Investment company in the UK attracted attention in November when it took out a substantial holding in bitcoin, and is currently trading at an almost 1 per cent discount, after netting between £327m and £693m in profit from the trade, with a total return of 16.8 per cent for the past 12 months, according to the Association of Investment Companies, an industry body.

Cryptoasset investments are available on many big investment platforms in the UK, though whether it should be offered to non-professional investors has long divided opinion. Some say the risks to retail investors remain profound.

“It’s important to note that [Ruffer] only invested around 2.5 per cent [in bitcoin] of a portfolio that is otherwise invested in more traditional assets,” said Mr Khalaf.

Writing about the recent sell-off in a note, Simon Peters, cryptoasset analyst at investment broker eToro, said: “The most bullish large-scale investors have been using the recent price dip as an opportunity to add to their balance sheets at a (relatively) cheap price and retail investor sentiment continues to remain positive.”

The largest holders of bitcoin remain those investment houses which are focused on cryptocurrency and digital assets, rather than traditional asset managers. But other companies are buying too. Square, a mobile payments company founded by Twitter chief executive Jack Dorsey, holds a stake worth $155m, according to data provider Bitcoin Treasuries.

Dan Lane, a senior analyst at Freetrade, said: “The longer crypto stays part of the conversation, and the more bigger firms explore blockchain and its potential usage, the more investors feel validated in gaining exposure to the asset.”

However, Mr Khalaf said retail investors remained at risk. Cryptocurrency investments are not covered by the Financial Services Compensation Scheme if something goes wrong. An FCA ban on the sale of cryptocurrency derivatives to retail investors came into effect in January.

In a post that appeared on eToro’s bitcoin page, Butler, an “elite” investor on the platform, likened patterns of investor enthusiasm now to those he saw in the run-up to the 2017 price collapse, when his mother had said she was thinking about investing in bitcoin.

“I would not be overly surprised if bitcoin broke through $50,000 and beyond, but I have also seen it lose more than 80 per cent of its value,” Butler said. “You have to ask yourself, are you in a financial position to lose 80 per cent of your holdings in cryptocurrencies right now?”



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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