In what is one of the lowest that bitcoin has achieved since touching near $20,000 levels in value last year, the virtual currency traded at $6,617 on Friday – the beginning of a long Easter week end. This value is also its lowest since going below $6000 on February 6. The drivers for this bad performance was fear among traders about the impact of new European Union (EU) rules designed to lowering of the leveraged trades that are offered by brokers. That led to a global sell off the crypto currency as there were combined fears of similar steps being taken in Asia.
The leverage limits for investors for cryptocurrencies would be cut to 2 times according to a set of product intervention rules that was introduced by the European Securities and Markets Authority (ESMA) e
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arlier this week. That leverage is offered by brokers through a derivative called contracts for differences (CFD).
The change in leverage would be a drastic one compared to what previously was offered – such as by major exchanges, such as those in Japan, and brokers, which was typically 15 times, said traders.
A “spectre of deleveraging” took place by that rules that resulted in the sell-off. Traders said that in the short term at least, such a “spectre” could continue to negatively impact trading.
“Leverage has been a big driver for bitcoin trading. US$6,000 is a key psychological level, and if we broke it (again) then bitcoin would be poised for a further downward side, which I wouldn’t be surprised might eventually hit US$2,500,” said Stephen Innes, head of Asia-Pacific trading for online currency trading platform Oanda.
The bitcoin (USD) price index quoted by Coindesk showed that some value was recovered by bitcoin later on Friday as it reached a high of around $7,082.
Bitcoin trading has benefitted from leverage.
About 40 percent of the daily trading volume has bene contributed by Japanese retail investors and therefore they are a key driver for trading volumes, Innes said.
“When you cut leverage from 15 times to 2 times, it means that anyone who had been trading at 15 times leverage, on US$10,000 capital who was able to buy US$150,000 worth of bitcoin on margin in his account, could now hold a position of US$20,000 worth of bitcoin,” said Innes.
Traders thus engaged in sell off because they wanted to limit their losses but their highly-geared positions could very well be annulled by the new regulations.
Leverage on bitcoin trading has also bene offered through CFDs by online brokers such as eToro.
The fears in Asia was sparked by a sense that global regulators do tend to act in-sync with each other, even though only the product providers in Europe would be impacted by the ESMA intervention rules.
(Adapted from SCMP.com)