Will New Trading Rules Send Crypto Prices Lower? 08/12/20

New industry trading rules come into force next month and they are beginning to be rolled out by the big brokers. On Monday, Plus 500 and IG both provided clients with updates on the new regime which starts on the 6^th of January, 2021. There will definitely be an impact on the ability to trade cryptos like Bitcoin. As a result, there is the potential for prices to tumble as liquidity drains out of the market.

Source: AVA Trade

The FCA (Financial Conduct Authority) has decided to introduce a ban on cryptocurrencies being traded by retail clients in CFD markets. The extreme price volatility sometimes seen in the crypto sector being considered too much of a risk for amateur traders.

Those who qualify as Professional Clients and institutional investors such as hedge funds will be able to continue to trade crypto using derivatives such as CFDs. Retail investors trading CFDs who don’t meet the below criteria will not be able to buy crypto from the 6^th of January onwards.

Are you eligible for Professional Client status?

• Sufficient trading activity in the last 12 months – those who have booked at least ten transactions per quarter, of significant size, over the previous four quarters on the relevant market.

• Financial instrument portfolio of over €500,000 – There is no obligation to deposit this amount which includes cash savings.
• Relevant experience in the financial services sector – Will include those who have worked or are working in the financial industry. They must have done so for at least one year in a professional position which requires knowledge of the related transactions or services.

The €500,000 net worth condition will be a high bar for many. Statistics show that more than 75% of UK residents who own crypto hold a position smaller in value than £1,000.

Some might be able to use ‘grandfather rights’ and continue trading, and others could feasibly draw on work experience.

If they can’t, then from the 6^th of January they will be able to sell any existing positions but not add to them. What could that mean for price?

Source: AVA Trade

Possible Scenarios

One scenario is that traders use the existing time window to scale up on long positions. The CFD broker platforms do offer a convenient and very user-friendly way to take positions.

The alternative is that by literally taking buyers out of the market prices may fall. If retail investors can only sell, then the price of Bitcoin, Ethereum, XRP and Litecoin should come under pressure.

It’s hard to tell which scenario will pan out. The unpredictability of crypto prices is after all the reason the FCA has drawn up the new rules. It is, though, a situation worth monitoring.

With the price of Bitcoin posting all-time high prices in the region of the mythical $20,000 level it looks to some to be already over-extended.

Next Steps

With the deadline firmly in place, it will be interesting to see how other variables come into play. The crypto markets are global and the UK is only a small percentage of the total flow. Should other regulators such as the SEC in the US and BaFin in Germany also tighten up their approach it could further reduce buying pressure. At that point, things could become even more interesting.

Nigel Frith

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