It is no secret that many investors believe that Bitcoin is in a price bubble that could, at any time, burst. However, at the moment, this would only affect the investors. If you start to add leverage, which refers to the buying with borrowed money, experts are worried that it could affect the entire financial system.
The US Financial Stability Oversight Council is designed to watch for system-wide vulnerabilities and has said regarding cryptocurrencies that;
“It is desirable for financial regulators to monitor and analyse their effects on financial stability”.
However, just this month, regulators have allowed two different US exchanges to launch Bitcoin futures contracts, which has led industry leaders to think that the government actually moved too fast.
Futures contracts mean that the exchange will absorb counterparty risk, so for example, if you buy gold futures, you do not have to worry that whoever sold the contract will not pay up. If you close your trade at a profit, the exchange will guarantee payment. This is why some were incredibly unhappy about the decision to launch Bitcoin futures.
Whilst leveraging Bitcoin won’t necessarily crash the financial market, it could in theory. At least one transmission channel is now open via the futures exchanges, and this is only the beginning and it is likely that more will follow. So, whether you like Bitcoin or not, or chose to invest, it will still become your problem. The regulators think that this is completely fine, but we are yet to see if they are right or not. Let’s hope they are…
Image Source: Flickr