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The price of bitcoin soared to record highs on Monday and approached the symbolic $10,000 threshold even as some traditional marketplaces warned they were becoming “uncomfortable” with the volume and volatility of trading in the cryptocurrency.
Bitcoin’s value has risen more than 850 per cent from around $1,000 at the start of the year to a high on Monday of $9,747, an ascent that masks dramatic drops along the way.
IG Group, the world’s largest online trading platform, told the Financial Times it had suspended trading of some of its bitcoin derivatives on Monday after roaring demand for the products left the company facing a high security risk.
Other online marketplaces, including Plus500, have raised the fees they charge in dollars to hold an open position in bitcoin, with some demanding what would amount to 175 per cent of the trade over the course of a year.
The price has been buoyed by last month’s decision by CME Group, the world’s largest exchange operator by market value, to launch bitcoin futures by the end of the year in response to demand from some of its biggest users. The move by a traditional market has helped give the cryptocurrency legitimacy in the eyes of some traders, analysts said, as has an influx of hedge funds and other semi-institutional names into the market.
The recent rise has also been fuelled by spread betting and electronic platforms entering the market with increased marketing fanfare as well as the rise of “initial coin offerings”, which require the cryptocurrency to be obtained for investing.
However its rapid ascent and wild volatility is raising concerns among regulators and some participants that an immature market could pose dangers to both retail punters and the companies are trying to cash in on the trend.
“We don’t have the past five, 10, 15 years of data to understand the economics of cryptocurrencies . . . could they fall over?” said Jake Green, regulation partner at Ashurst, a law firm, adding that regulators were struggling to keep up with the pace of financial innovation in the space.
Unlike traditional currencies, bitcoin bypasses any central banking system, which means investors who buy it are not afforded any consumer protections. Some regulators have warned investors of these dangers as well as the potential for heavy losses.
The London-listed IG Group, which has a market capitalisation of around £2.5bn, has allowed retail investors to trade cryptocurrencies electronically since 2013. Its “contract-for-difference” markets track the price of an underlying asset and allow investors to leverage their bets, magnifying gains or losses.
This month however, high demand for bets on the price continuing to rise has led to the company repeatedly approaching its internal limits for exposure to cryptocurrencies, it said. When a trading platform cannot net customers’ trades against each other, some will act as a market maker, going out into the market to buy the underlying asset.
“We have strict internal hedging limits on certain exotic products — principally cryptocurrencies — to determine how much of the underlying asset we are exposed to [and] avoid risks we’re not comfortable with,” said Peter Hetherington, IG Group’s chief executive, citing cyber security risks. “Where we get close to reaching those limits, we stop taking new positions.”
If the price continues to climb, new long positions on those types of products could be unavailable “with regularity going forward”, he added. IG customers are always able to close existing positions. The limit for the amount of bitcoin IG can hold is set at tens of millions of pounds of exposure, the company said.
“The more cryptocurrency [the broker] holds, the greater the security risk,” said Javier Paz, an analyst at consultancy Aite Group. He warned of the “very high” risk of hacking for the platforms — but also the unregulated exchanges that act as their counterparties.
While analysts welcomed the cautious approach by IG Group, they have raised questions about whether other providers will be able to operate in future.
“[IG Group] is being responsible,” said Mr Paz. “You could go to a firm that has no interruption and fills every order . . . But if markets go haywire, it is unclear how they will cope.”
Additional reporting by Izabella Kaminska in London