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Retail Investors – Easy Pickings?

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MiFID II and MiFIR did a lot for retail investors. Especially when it comes to derivatives trading in capital markets. At the same time, in the U.S., the Office of Compliance Inspections and Examinations (OCIE) has been in place for over 25 years to help retail investors. Regulators in both Europe as well as the U.S. have long focused on ensuring that individual investors’ assets are kept safe from theft and misuse.

Is this protection available when it comes to the growing market of crypto investors though? If it isn’t, then, can it get its house in order before a big crash?

Moves such as China banning crypto, followed by India in recent weeks, have both been welcomed and caused distress to an equal extent. Ultimately, though, what China and India are doing must be in the name of protecting individual investors. As well as protecting their own currencies, one might argue. 

The alternative is to buy local equities or treasury bonds in the case of the U.S., while in the UK the largely antiquated premium bonds offer another ‘safer’ haven for the retail investor. Any of these investment products are welcomed by regulators as they are easier to regulate, and they make it easier to protect the interests of individual investors.

But what happens when investors stop worrying about protection? Much as can be seen with the huge uptake in the usage of platforms such as Binance? Who are not only not regulated, but who come with a warning by many national regulators across the world?

The rise of Shilling/Pumping and its effect on retail investors

A few weeks ago, we spoke to Jacobi Asset Management about the various tactics being used by the Winklevoss twins, Elon Musk or Michael Saylor. How they often big up crypto, be that bitcoin or the less attractive dogecoin. Elon Musk even appeared in a meme where he was carried to the moon by what can only be described as some sort of over-grown puppy on a coin:

These memes and the hope presented by bitcoin have attracted a huge number of new investors. Crypto investors have doubled this year according to the World Bank and Crypto.com. And yet, at the same time, regulation of digital assets has hardly changed.

This poses at least two big concerns for market participants.

Reddit proved, earlier in 2021, that retail investors as a community are able to take on the hedge funds. With crypto the situation is comparable, however, the sums involved are far larger. Just as Reddit users drove prices of GameStop and Robinhood stock, the same is the case in crypto. Today, Matt Damon is the face of Crypto.com. Not to mention Kim Kardashian…

It doesn’t stop there either. Sports events and teams are all promoting crypto. Even teenagers are starting to feel comfortable with the pressure to get involved in the hype. One must wonder how things will play out; the current status is clearly untenable in the long run.

The other concern is about the sums of money being removed from traditional savings vehicles like life insurance, equities, or investment funds within various jurisdictions across the world. The natural consequences of disruption are sweeping through these markets anyway, but the drop in liquidity must be taking its toll too. Retail investors are not the only ones moving into the crypto space, larger asset managers and investment funds have moved into the sector too:

What would be the repercussions if bitcoin dropped back down to $300 though? What would happen to the global economy if crypto collapsed, again?

Mount Gox and Crypto Winter could happen again

Many years ago, in a country far far away (Japan), there was a cryptocurrency exchange named Gox. Within a few years of operating the platform, 70% of all global crypto was flowing through this exchange. Words like ‘renegade entrepreneurism’ and ‘poor management’ haunted the bankruptcy which effectively wiped out $460 million of bitcoin being held by the platform. Hackers, apparently.

At the time, 850,000 bitcoins didn’t resemble that much money, with the cryptocurrency trading nearer $650 at the time (March 2014). The sums involved are less than some whales’ daily activities in today’s markets.

Although there were numerous investigations and cases filed in the aftermath of Mount Gox, Mark Karpeles, the CEO, was not an experienced CEO or investor. He may not have thought out his back-up plan properly. He was potentially caught by surprise. And what about the hackers? Where are they today, who are they? Will we ever find out?

The crypto winter of 2017 was a completely different matter. By this point, bitcoin had hit $20,000 and thousands of investors had bought in at the peak. Within a few weeks, bitcoin collapsed down to $7,500 and then headed further south to almost $3,200 by the following winter.

There were concerns at the time that newer crypto traders could be permanently put off. Looking at current market activity, though, clearly things have recovered.

There are several things to consider here. One whale can often lead to a massive price correction, which traditional markets sometimes offset through trading in ‘dark pools’. Hacking continues to present a massive risk too, but here there is no clear way to mitigate that risk.

What would happen if Binance turned around and claimed over half of its’ bitcoin had been stolen by hackers? Would an international investigation ensue? Could the hack even be proved, or would we have to trust Binance to be telling the truth? Bearing in mind the risks involved for their leader, one can only assume that he has a plan in place for this situation. Let’s hope the plans involve saving individual investors assets too.

Why is the Regulator not doing more?

Today, over $30 billion a day is traded on Binance. By far the largest market participant in the world when it comes to crypto. Earlier in 2021, the exchange already reneged on millions of dollars’ worth of bitcoin transactions, and their CEO has learnt that individual investors have little to no recourse to their lost funds. And that the regulator can do next to nothing to him as well.

So why is the regulator not doing more? When sugary drinks affect the health of our children, market participants are bullied into acting. When cigarettes are proven to harm our health, steps are taken to remove the opportunity for advertising of cigarette brands. The same is the case with alcohol.

So why does the same not apply to Binance and other unregulated market participants? Even today, in the infamous Bitcoin & Crypto – United Kingdom group on Facebook, individual investors write to each other about how they are still able to transfer money to and from their Binance account. Even from reputable high street banks. The same is the case in the U.S.

Of course, understanding the new technology that cryptocurrencies present is not as easy as understanding tobacco smoke or how sugar causes diabetes and obesity. But does it really need to get to the stage where people around us are adversely affected for anything to be done? Will it not be too late by then?

The regulators have the answer. In the meantime, retail investors need to ask far more questions from the cryptocurrency exchanges they are using. They certainly need to be more immune to Shilling and Pumping.

Author: Andy Samu

#DarkPool #CryptoWinter #MountGox #Regulator #Cryptocurrency #Bitcoin #Shilling #Pumping #Binance #RetailInvestors

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