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CRYPTOCURRENCIES: FUTURE OR FRAUD?

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Elizabeth Belugina

Elizabeth Belugina, the Head of Analytics Department at FBS

These days cryptocurrencies are now on everyone’s lips. Are we on the edge of new financial reality or is this just another bubble?

A new global passion

Elizabeth Belugina

Elizabeth Belugina

In the year of 2017,there are a lot of cryptocurrencies: Bitcoin, ETH, Ripple, Litecoin, Solar Coin, Waves and hundreds of other “coins” that emerge almost every day.The overall capitalization of this market surged by more than 800% this year. Because of their specific features cryptocurrenciesare considered a new asset class, which currently offers the highest returns among all asset classes. Cryptocurrencies have no intrinsic value and are valuable only when exchanged with other currencies, but unlike fiat money, they don’t represent debt.

Although a lot of people rushed into Bitcoin – the first and the most popular cryptocurrency – not all of them can boast of understanding the blockchain technology, which lies at its basis. The blockchain is indeed a revolutionary thing. It allows building systems of distributed ledgers, which are based on peer-to-peer networks of computers and do not have a central authority. In such systems, transactions are recorded and verified on a shared, virtually incorruptible database in the form of a chain of blocks. A non-tech mind can concentrate on the main benefits of the system: the need of oversight or intermediation goes away, transactions become cheaper, transparency increases as transactions cannot be altered or deleted.

Bitcoin came into existence just a few weeks after the global financial crisis, yet the world has become really obsessed with it only this year. According to CoinDesk, about 40% of crypto enthusiasts bought Bitcoins for the first time in 2017.

Where the price comes from?

Bitcoin’s price depends on several factors.At the base of everything, there’s, of course, supply & demand.

Bitcoin supply is limited. The total number of Bitcoins in existence is not expected to exceed 21 million. In line with Bitcoin generation algorithm, the number of Bitcoins generated per block is set to decrease by 50% approximately every 4 years. Finite supply is one of the reasons why the asset’s price is going sky-high.

Picture – BTC/USD weekly chart

Picture – BTC/USD weekly chart

Demand is another big driver. A lot of Bitcoin investors became such out of fear of missing out (FOMO). Many websites contributed to the rush with posts that a person who bought 250 Bitcoins in 2010 would have by now become a millionaire.

News flow is a great engine of the demand for Bitcoins. If well-known companies and businesses start accepting Bitcoins as a means of transaction, the cryptocurrency’s quotes move up.Negative news can be about government regulations in various countries, bankruptcy or hacks of bitcoin exchanges, related websites and services.In addition, Bitcoin falls when large players need fiat money and sell large quantities of Bitcoins to get it.

The most recent wave of interest in cryptocurrencies was driven by Initial Coin Offerings (ICO). ICOs are a new form of crowdfunding. Various types of ventures raise money by selling tokens for Bitcoins or other cryptocurrencies. Often an idea is enough to collect millions of dollars.These tokens grant investors access to a product or service that will be built with the money raised in the ICO. This option based on Ethereum – a cryptocurrency, but also a platform for apps – has broadened horizons for a lot of projects, but also gave scammers a way to attract funding and disappear. It seems that ICOs, which have gone rogue on a global scale, represent the main risk for cryptocurrencies’ ecosystem.

The future of cryptocurrency market: investor’s perspective

If you decide to trade cryptocurrencies, you’ll need to take into account the fact that they are highly illiquid and extremely volatile. Low liquidity is what makes the market vulnerable to speculation: large players can easily manipulate the price. Cryptocurrencies have low correlation with other asset classes but are highly correlated among themselves. As the price of Bitcoin climbed, investors got interested in other cryptocurrencies.

In addition, it’s necessary to understand that buying a cryptocurrency is not like buying a stock or commodity futures. There’s something of a Wild West in the cryptocurrencies market. Dealing with cryptocurrencies involves a whole bunch of risks:risk of systemic & flash crashes, centralized exchange hacking,fork risk, mining concentration risk, regulatory risk, compliance & due diligence risks and many other risks.

As Bitcoin’s price is still more than 300% up from the start of the year, concerns that such surge is a bubble are shared by the majority of market players. According to the famous anecdote, American businessman Joe Kennedy once said: “You know it’s time to sell when shoeshine boys gives you stock tips.” And now you can hear about Bitcoins everywhere. The current situation is often compared to 17th-century Dutch tulip bubble or the weeks before the dot-com crash.

On the bright side, crypto market cap varies between $100 billion and $147.1 billion, which is commensurable to the market cap of McDonald’s. It’s a drop in the ocean compared with other financial markets, so a scope for further growth exists.

There are several things that may drive Bitcoin “to the moon”. Blockchain technology is a revolution, which will lead to a better and a more efficient economy. Some experts compare it with the Internet and say that now that it is here it won’t go away. As cryptocurrencies are at the moment at the front side of the blockchain, it’s hard to believe that they will go down. The negative talk about Bitcoin and its brothers and sisters comes mainly from banks and governments, which of course can’t welcome something that will deprive them of control over money supply and circulation. Yet, it’s not likely that cryptocurrencies will be banned in the entire world. The Bank of Sweden has already started investigating a possibility of turning national currencies into cryptocurrencies.

That said, one has to understand that the market may be currently pricing in more than Bitcoin has to offer.As a result, short-term investment horizon is a most sensible option when dealing with Bitcoins – for now. Don’t be in a hurry to swap your fiat currencies for Bitcoins –nothing should be done in a hurry except catching fleas. At the same time, keep your eye on the ball: Bitcoin 2.0 will be the future.

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China, New Zealand ink trade deal as Beijing calls for reduced global barriers

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China, New Zealand ink trade deal as Beijing calls for reduced global barriers 1

By Praveen Menon and Gabriel Crossley

WELLINGTON/BEIJING (Reuters) – China and New Zealand signed a deal on Tuesday upgrading a free trade pact to give exports from the Pacific nation greater access to the world’s second-largest economy.

The pact comes as Beijing seeks to establish itself as a strong advocate of multilateralism after a bruising trade war with the United States, at a time when the coronavirus has forced the closure of many international borders.

New Zealand Prime Minister Jacinda Ardern confirmed the signing of the expanded deal.

“China remains one of our most important trade partners…For this to take place during the global economic crisis bought about by COVID-19 makes it particularly important,” she told a news conference.

The pact widens an existing trade deal with China to ensure it remains fit for purpose for another decade, Trade Minister Damien O’Connor said in a statement.

It provides for tariffs to be either removed or cut on many of New Zealand’s mostly commodities-based exports, ranging from dairy to timber and seafood, while compliance costs will also be reduced.

For a factbox on key deal points, please click on the square brackets:

CHINA’S MULTILATERAL PUSH

“The upgrade shows the two sides’ firm determination to support multilateralism and free trade,” Zhao Lijian, a spokesman of China’s foreign ministry, told a news briefing in Beijing on Tuesday.

The previous day, speaking at a virtual meeting of the World Economic Forum, President Xi Jinping had criticised isolationism and “Cold War” thinking and called for barriers to trade, investment and technological exchange to be removed.

In recent months, Beijing has signed an investment pact with the European Union and joined the world’s largest free trade bloc in the 15-country Regional Comprehensive Economic Partnership (RCEP), which includes New Zealand.

China has also expressed interest in joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) Agreement, the successor to a pact from which Washington withdrew.

China’s new deal with Wellington also opens up sectors such as aviation, education and finance. In exchange, New Zealand will increase visa quotas for Chinese language teachers and tour guides, the official Xinhua news agency said.

New Zealand was the first developed nation to sign a free trade pact with China in 2008, and has long been touted by Beijing as an exemplar of Western engagement.

China is now New Zealand’s largest trading partner, with annual two-way trade of more than NZ$32 billion ($21.58 billion).

But ties have been tested under Ardern’s government as New Zealand criticised China’s influence on small Pacific islands and raised human rights concerns about Muslim Uighurs.

Ardern also backed Taiwan’s participation at the World Health Organization (WHO) despite a warning from Beijing.

The wider trade pact also comes as Beijing’s ties with neighbouring Australia worsened after Canberra called for an independent investigation into the origins of the coronavirus pandemic, which was first reported in central China.

Australia has appealed to the World Trade Organization to review China’s decision to impose hefty tariffs on imports of its barley.

New Zealand, which will host the regional Asia Pacific Economic Cooperation summit this year, has said it would be willing to help negotiate a truce between China and Australia.

($1=1.3914 New Zealand dollars)

(Reporting by Praveen Menon; Editing by Aurora Ellis and Sam Holmes)

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Cryptocurrencies: the new gold?

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Cryptocurrencies: the new gold? 2

By Gerald Moser, Chief Market Strategist, Barclays Private Bank

Time to add to a portfolio?

There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.

While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.

Cryptocurrencies: the new gold? 3

Poor diversifier

And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.

Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.

In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.

An inflation hedge?

Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.

Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.

Other considerations

Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.

From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.

Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.

Cryptocurrencies are here to stay

Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.

And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 4

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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