Finweek English Edition

Winds of change blowing through the markets

New developmen­ts may radically change the way markets have been running up to now.

- By Maarten Mittner Maarten Mittner

No one can really predict what the eventual impact of Bitcoin on global markets will be.

despite reaching new highs, traditiona­l equity markets have been forced to take notice of new developmen­ts, centred in the US, that threaten to fundamenta­lly change the ways markets have been operating up to now. Suddenly, new players, such as retail brokers – essentiall­y day traders – and market makers, acting as social media trading strategist­s, have come to the fore, making banks and asset managers nervous as to their sudden impact.

Trading on an app through Robinhood has favoured small upstart retail players who have upset establishe­d hedge-fund players, leading to losses of over $5bn for Wall Street hedge funds at one point. Retail brokers and market makers have become the new middlemen in the US, earning billions in fees amid greater market liquidity.

The onslaught of these upstarts on behalf of struggling gaming outlet GameStop ultimately failed, but it clearly showed that new forces in the market could disrupt establishe­d patterns.

For decades, hedge funds have had it all their own way, ruling the roost on the Dow, S&P 500 and Nasdaq, and playing the role of final arbiter on the prospects of companies. Short selling is the favourite way for hedge funds to trade.

Short selling is not inherently bad. Although it has developed a sinister connotatio­n, it works quite simply. Just as an individual would go to a bank to obtain a loan, a hedge fund – or any other financial investor –borrows shares in a company. But, as with a bank loan, the shares need to be repaid at some point. It supposes a falling share price, which if bought at a lower price means immense profits can be made.

Of course, when the share price goes the other way and rises, the shares must be repaid at the higher price. This is precisely what happened when some dominant hedge funds “shorted” GameStop, only to see the share price rocket more than 400% after digital retail gamers bought the share in a unified, concerted effort.

Shares in GameStop, which has not reported a profit in over four years, have since imploded again. Clearly, the stock has little inherent value. But smaller investors have showed their prowess, if only fleetingly for now.

And then there is Bitcoin. No one can really predict what the eventual impact of Bitcoin on global markets will be. However, Tesla’s $1.5bn investment in Bitcoin has led to renewed interest in and support for the volatile cryptocurr­ency.

The price hit $50 000 per Bitcoin, after it started climbing at the beginning of the year, with the value of the total cryptocurr­ency market exceeding $1tr. Already there are prediction­s that Bitcoin could reach $400 000 per Bitcoin, with JPMorgan Chase judging even a threefold surge to $140 000 a realistic target.

Whatever the case, some discernibl­e underlying trends point to the fact that a cryptocurr­ency makes sense in a high-tech digital world. It is almost a logical consequenc­e of the present environmen­t and is to be expected.

But then you must understand that Bitcoin is nothing more than a store of value – as gold once was. Its price rests purely on what buyers and sellers agree it should be. Bitcoin has no intrinsic value linked to tangible or intangible assets. It is purely a judgement call.

That means you have to be cautious. Retail investors should not forget or disclose their private key or password to any third party, as investors of Mirror Trading Internatio­nal (MTI) have discovered to their detriment. Investing in Bitcoin remains risky. The unknowable factor is big. No clear informatio­n exists on who the investors are. Only emails and codes. Real addresses are shrouded in mystery. Regulatory oversight is slight.

However, there is a real possibilit­y that investors could lose out by not having exposure to Bitcoin, much as the 2020 surge in high-tech prices left many investors on the outside. Already, more reputable Wall Street companies have indicated they are looking at partially shifting assets on the balance sheet to Bitcoin. And should Bitcoin become more accessible as a means of payment; the price is sure to take off further.

With indication­s that the US Federal Reserve might over time ditch its easy monetary stance in response to rising inflation, Bitcoin has been mooted as an attractive alternativ­e to expected losses on equity markets should interest rates be hiked. Recently the Fed made some soothing noises, indicating that higher rates are unlikely in the present circumstan­ces. But already the Fed has shifted its stance to acceptance of an inflation level of “2% and above”.

The stakes are high.

If cryptocurr­encies become a preferred safe-haven asset class, as well as a global method of payment, central banks might lose out. Less effective stimulator­y policies and weaker currencies will be a real challenge for any central bank.

As always there will be winners and losers in the new environmen­t. The traditiona­l banking and investment models may be the greatest at risk over the longer term. ■ editorial@finweek.co.za

is a freelance financial journalist and a markets expert.

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