Swelling cryptocurrencies interest among retail investors in Japan means that foreign exchange brokers in the Asian country face a “higher risk of failure”, an analyst at Deutsche Bank has warned.
Retail investors are “shifting from leveraged FX trading to leveraged cryptocurrency trading,” reckons Masao Muraki, global financial strategist at the German bank, in a note published this week.
According to a Financial Times (FT) report, the surging price of bitcoin — from ¥114,000 at the start of the year to about ¥1.9m Friday — has attracted interest from the global financial sector and is increasingly talked about on mainstream media outlets.
For Japan, the mounting attention presents a unique set of risks. There is a long history of margin trading — or making bets using borrowed money — in the country, particularly focused on currencies.
This type of trading magnifies both the potential returns, but also the losses. Since the client only needs to place a sliver of the overall position down as collateral, it means that the broker is taking on the risk that the client fails to pay up if ructions abruptly hit the market.
“Leveraged cryptocurrency trading services are available in Japan. Some major FX brokers are using the same 25-times leverage limit that applies to FX trading, but there are no direct rules in leveraged trading of cryptocurrency,” said Muraki.
He explained that following the turbulence in the traditional currencies market that followed the Swiss National Bank’s 2015 decision to remove a cap on the value of the franc against the euro, a wide range of brokers experienced losses.
“During the Swiss franc shock in January 2015, many retail investors not only received margin calls but also incurred losses greater than their margin balances, because forced settlements couldn’t be implemented in a timely manner,” said Muraki.
“This shows that investors can suffer losses which brokers end up booking as credit losses even with leveraged FX trading of developed nation currencies.”
Since cryptocurrency transactions take at least 10 minutes to settle (sometimes much more), “the risk of incurring losses greater than margin is higher than in normal FX trading, due to high intraday volatility,” Muraki added.
On top of those issues, Muraki also reckons that retail investors are stuck in a win-or-lose game with much more sophisticated institutional investors employing algorithmic trading that leaves no room for middle ground: “It would be very difficult for businessmen trading on their smartphones during lunch or after work to sustain their trade wins.”