15th July 2019
The first five months of 2019 have been kind to the cryptocurrency market with some interesting cryptocurrency trends that are worth watching. The price of Bitcoin (BTC), the largest and most liquid cryptocurrency pair, has rallied by more than 200%. Prices are in the process of consolidating their gains, and those who are part of the Bitcoin bull run have several concepts to cheer about. While the SEC (United States Securities and Exchange Commission) has delayed its decision to approve a Bitcoin exchange-traded fund (ETF) managed by Van Eck and Bitwise, the market is pricing in a successful release.
Additionally, Facebook announced that it was evaluating a Facecoin that could be used across their WhatsApp platform. Separately, Fidelity is now getting into the fray. The company is analysing the benefits of offering over-the-counter trade execution and order routing for Bitcoin. Safety and security are also a focus, which has driven traders toward CFD platforms.
Most of the cryptocurrency transactions that occur are exchanges within cryptocurrency wallets. To buy a cryptocurrency, you need to exchange it for a sovereign currency or another cryptocurrency. You can then exchange your sovereign currency for a cryptocurrency. The exchange rate of a cryptocurrency is determined by market participants.
When the transaction is complete, your cryptocurrency will be deposited into an address that can be housed in your digital wallet. If you wanted to exchange your cryptocurrency for a good or service, you would provide your digital address.
While this process seems archaic, it is set up to prevent fraud. Unfortunately, there have been some high-profile thefts within the cryptocurrency system and an alternative way to trade the cryptocurrency market is to use contracts for differences. These are financial instruments that track underlying cryptocurrencies.
If you want to use cryptocurrencies to purchase goods or services, then the wallet methodology is best. If you are more interested in trading cryptocurrency price movements, then CFDs offer a robust alternative. Trading with a CFD broker is also more cost effective. Some cryptocurrency wallets charge a commission of up to 3%, compared to a bid-offer spread that is generally much narrower at a CFD broker.
Currently, investors in the US who do not have access to the futures market and are unwilling to open a digital wallet, are unable to speculate on cryptocurrency prices. The ETFs that could be approved by the SEC would change that scenario.
On May 20, the SEC announced that it would postpone its decision on a Bitcoin ETF for another 35 days, to continue the process of factfinding. The underlying reasons for the delays are that the SEC wants to gauge public opinion on a Bitcoin ETF. The delay should not be construed as a sign that the agency is saying no. They have not denied the approval so investors can still have hope.
Additionally, the SEC wants to gauge the volatility of Bitcoin. What they are likely to find is that Bitcoin can be even less volatile than some of the major US stock indices. Bitcoin futures, which are traded on the CME, are experiencing solid volumes. The increase in the demand for over-the-counter credit default swaps, which are marketed by investment banks, are hedged with Bitcoin futures.
The Bitcoin credit default swap dealer strategy is market neutral as they use the futures to offset the outright price risk, attempting to capture a bid-offer spread. This provides a natural damper to volatility as more traders enter the market.
Another trend that appears to be accelerating is the announcements of new coins operated by high profile companies. Facebook announced that it is venturing into the cryptocurrency sector with a digital coin that could be used across its platforms. This is the second time the social media giant has attempted to launch a coin.
In 2010, Facebook attempted a digital coin that failed. The issue was that Facebook had to eat the cost of changing sovereign currencies to their cryptocurrency, which would not be the case on one of Facebook’s digital platforms.
This time, Facebook is planning to develop a coin on a blockchain platform which would make it similar in some ways to Bitcoin. However, one of the big differences between the Facebook coin and other cryptocurrencies is that the digital Facebook currency would be pegged to a sovereign currency such as the dollar. This would weed out speculators as the price would remain at a fixed level. The benefits to the industry are that it promotes the trend of digital coins. Facebook would attempt to monetize its digital coin in the same way that Google has driven revenues from Google Play.
There is substantial upside for Facebook investors if the company is able to leverage its platform with a digital coin. In fact, Barclays, the UK investment banking giant believes Facebook could add an additional $19 billion in revenues by 2021. So it’s worth keeping an eye on the development here.
News that Fidelity was entering the cryptocurrency market, was another trend that will likely continue. What is clear is that many companies believe there is a business niche that can be exploited. Fidelity started a custody service in 2019, which is geared to helping institutional customers buy and sell cryptocurrencies such as Bitcoin.
Fidelity released a study that found that its clients believe that digital assets are worth the investment risk. The customer survey provided some strong incentives. According to the Fidelity survey, almost half the respondents were positive on cryptocurrency investing.
Fidelity is not the only US equity brokerage house that is offering some form of the cryptocurrency business. Fidelity joins brokerages E*TRADE Financial Corp and Robinhood in offering cryptocurrency services.
An observable trend in the cryptocurrency market during the first few months of 2019 is that volumes are increasing along with prices. The SEC is on the doorstep to approving a couple of Bitcoin ETFs which should further increase trading volumes. In addition, some major players are looking to launch a coin of their own or provide brokerage services to the cryptocurrency market. All signs point to this cryptocurrency trend continuing for the balance of 2019.
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