Risk from Cryptocurrencies Increases

The US Securities and Exchange Commission (SEC) has approved the ProShares Bitcoin futures Exchange Traded Fund (ETF) application, the first cryptocurrency the US financial markets regulator has approved.

The SEC has been wary of approving ETFs that track Bitcoin’s spot market due to its fear of price manipulation within the crypto space. The regulator said it feels investors are safer when they invest in Bitcoin futures ETF over the regular Bitcoin ETFs.

This news has generated huge interest and driven the price of Bitcoin to new highs. It has also highlighted the risks involved.

This development makes Bitcoin seem a little more normal, part of mainstream finance. Priced in dollars, if you can buy and sell futures in a regulated US exchange, it starts to look like other listed, traded and liquid assets.

The downsides of cryptocurrencies are well known – their association with crime, tax avoidance, hackers, hucksters and fraudsters, and the huge amounts of energy needed to mine them. With no intrinsic value, cryptocurrencies such as Bitcoin seem more like Ponzi schemes, with their value only supported by the willingness of people to buy and hold them. The authorities regularly warn buyers that they could lose 100% of their value.

While gold is rare, physical and portable, the Financial Times recently questioned the usefulness in an extreme emergency of a ‘string of non-replicable computer code’ to buy anything of use.

Then Deputy Governor of the Bank of England Sir Jon Cunliffe made a speech in September pointing out that, with $2.3 trillion held in cryptocurrencies of all types, they do not represent a threat to the value of a financial system worth $250 trillion. The Dotcom crash of 2000-2003 saw $5 trillion wiped off the value of shares and the financial system remained stable.

Sir Jon Cunliffe’s conclusion was that the risk to the financial system is small, for now. But a PWC study suggesting 21% of hedge funds investing in cryptocurrencies, pension funds in the US and Australia said to be dabbling with them and with the SECs approval of Proshares Bitcoin futures EFT application, things are changing. China has already decided the risks are too great and has banned cryptocurrencies.