BETTING on the price of bitcoin may soon be deemed illegal gambling.

ON September 24th the price of a single bitcoin, the best known cryptocurrency fell by $1,000 in 30 minutes. No one knows why, and few people cared.

There have been similar drops nearly every month since May. Yet for one obscure corner of the market, it mattered. Exchanges that still ''long'' bitcoin derivatives contracts, with which traders bet that prices will rise without buying any coin, soon asked punters for more collateral.

That triggered a stampede. By the end of that day $643 million worth of contracts had been liquidated on BITMEX, a platform on which such contracts trade. Bets on other crypto currencies also became toxic.

Crypto-derivative products, which include options, futures and more exotics beasts, are popular.

More than 23 billion have been traded so far in 2019, according to chainanalysis, a research firm. But tantrums such as this recent one, have put them in regulators cross-hairs.

Japan is considering stringent registration requirements. Hong Kong bars retail investors from accessing crypto funds; Europe has had stiff restrictions since last year. Now the FINANCIAL CONDUCT AUTHORITY [FCA], a British watchdog, is proposing a blanket ban on selling crypto-derivatives to retail investors. A consultation ended on October 3rd.

It would take an earthquake for the FCA not to press ahead.

In the real world, importers buy derivatives as a defence against slumps in their domestic currency. But crypto-monies are not legally recognised currencies.
They do not reliably store value, rarely serve as a unit of account and are not widely accepted.

Peddlers of crypto-derivatives , the FCA says, cannot claim their wares are needed for hedging purposes.

That explains why most such derivatives are marketed as investment products. Yet they are not tempting places to park savings. The assets they track are hard to value : virtual monies promise no cash flows.

The honor and serving of the latest Global Operational Research on Crytpcurrencies, continues. The World Students Society thanks The Economist.


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