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China crackdown fuels bitcoin surge

Global markets started the week on a turbulent note. Reuters image.

(ATF) Bitcoin broke through $18,000 on November 18 to hit its highest level since December 2017, and has soared about 160% this year.

Many analysts attribute the rise to hedging against future inflation or the global search for yield, but Singapore-based trading firm QCP Capital noted the simple supply and demand dynamic created by China’s crackdown on bitcoin exchanges in recent months, which has made it increasingly difficult for Chinese ‘miners’ to turn their holdings into regular cash.

The steep trajectory of bitcoin’s 2020 rally echoes that of 2017, when a retail-led buying spree pushed it to nearly $20,000, only to crash more than 50% a month later.

Unlike 2017, however, the asset now boasts a functioning derivatives market and custody services provided by established financial institutions.

The value of open interest in bitcoin futures at CME Group crossed $1 billion this week for the first time since their launch in December 2017, while positions across major options markets have grown to over $4 billion from virtually nothing in early 2019, Reuters said, citing crypto data provider Skew.

Large firms including Fidelity and Nomura have starting safeguarding bitcoins and other cryptocurrencies for institutional investors.

“There’s absolutely no comparison in terms of market maturity between this year and 2017,” Ryan Selkis, CEO of crypto data firm Messari told Reuters. “Back then derivatives and credit markets barely existed (and) institutional custody didn’t exist.”

The emergence of this kind of infrastructure has made it easier for professional investors from hedge funds to family offices to seek exposure to crypto.

“The accessibility has changed from three years ago so the types of players that are willing to go in has broadened,” said Tim Swanson, head of market intelligence at blockchain software firm Clearmatics.

Their involvement, the argument goes, may lead to more liquidity and less volatility in prices.

Regulation has also developed. While the cryptocurrency sector is still mostly lightly overseen or unregulated, global standards on areas such as anti-money laundering (AML) have emerged, opening the way for bigger investors.

Mainstream companies and governments are among those embracing digital coin technology.

Last month, PayPal said it would open up its platform to cryptocurrencies while rival Square said it had invested 1% of its total assets in bitcoin.

Unlike 2017, bitcoin’s price has been supported by an appetite for riskier assets following government and central bank stimulus measures to combat the impact of Covid-19.

Bitcoin’s supply is capped at 21 million, shielding it from policies that stoke inflation, proponents say.

The narrative has allowed “a wider group of investors, including those with a more fundamental mindset, to participate in price setting,” said Richard Galvin of crypto fund Digital Asset Capital Management.

Yet for all the improvements in market structure and mainstream recognition, bitcoin remains highly volatile. The cryptocurrency sector is still more opaque and less regulated than mainstream financial markets. Trading data remains patchy and concerns over market manipulation are rife.


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Jon Macaskill

Jon Macaskill has over 25 years experience covering financial markets from New York and London. He won the State Street press award for 'Best Editorial Comment' in 2016


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