The financial markets are a weird beast.
They have a noble feel to them. Those on the inside like to think they are the proverbial bees-knees.
They flap their yaps on TV, using the latest jargon, not in an effort to inform and educate, but rather in an effort to show how smart they are.
It’s easy to tell. The more someone uses jargon and ‘insider’ language, the less you’ll learn from them…and the more self-important they feel.
At Port Phillip Publishing, we do all we can to drive jargon and self-importance out of our editors and analysts.
But there’s more to the mainstream’s attitude than self-importance. It’s the underlying idea that individuals shouldn’t be trusted to look after their own money and investments. It’s the idea that individuals don’t understand the financial markets…that they’ll wreak havoc if they’re allowed anywhere near it.
We remember this all too well in the lead up to the financial meltdown in 2008. The bighead financial pros poured scorn on the ability of individuals to trade using what at the time was a new trading instrument — Contracts for Difference, or CFDs.
CFDs are highly leveraged. In some cases, we’d agree they are too highly leveraged. Some CFD operators will allow traders to take out a $100,000 position on an index or foreign exchange contract, using as little as $1,000.
A 1% move in the right direction can result in the trader doubling their money. A 1% move in the wrong direction can wipe out the trader’s stake. Not a good idea.
But used in the right way, and providing the individual trader understands how leverage works, CFDs are an incredibly useful and effective way to trade the market.
That didn’t stop the cries from Collins Street and Martin Place, claiming that CFD traders represented a systemic risk to the market and the worldwide economy.
As it turned out, and as we knew all along, individual investors aren’t a systemic risk. Individuals don’t have a large enough access to borrowed capital (loans) to create that risk.
The risk, as always, is in the hands of the know-it-alls and big heads on Collins Street, Martin Place, Wall Street, and in the City of London. It’s they who not only fully utilize 100-to-1 leverage, but who do so in a much larger way.
An individual (and knuckleheaded) trader may very well use a $1,000 down payment to make a $100,000 trade. But a big Wall Street trader will play with much larger sums. They’ll use a $1 million down payment in order to make a $100 million trade.
The old saying is that if you can’t repay a $100,000 loan to the bank, you have a problem. But if you can’t repay a $100 million loan to the bank, the bank has a problem. Hence the financial meltdown in 2008.
The relevance of this today?
Until now, the cryptocurrency world has mostly been the realm of individual investors and boutique fund managers. Recently, that changed.
The Chicago Board of Options Exchange (CBOE) now offers futures trading on bitcoin.
It won’t be long until they offer options trading — both on the futures contract and on the underlying bitcoin.
From there, it’s a very short leap to other more complex financial derivatives and insurance contracts. Just as Wall Street leveraged off the US housing market in the 1990s and 2000s, so it will leverage off cryptocurrencies.
And our bet is, just as Wall Street managed to blow up the housing market and almost the entire world’s economy, the same or a similar fate awaits bitcoin when Wall Street fully sinks its claws in.
The only question is how long it will take for that to happen. It took nearly 20 years for the full effect of Wall Street’s meddling in the US housing market to filter through the system. We doubt if it will take that long for Wall Street’s meddling in bitcoin to result in the same outcome.
Publisher, Markets & Money
Editor’s Note: This article is an edited extract from Crash Market Investor.