Banks and crypto-currencies: A displayed hypocrisy
At first, the banking community was fiercely opposed to crypto-currencies. This is evidenced by the different declarations of the highest financial heads in office.
Ulrich Stephan of Deutsche Bank warned investors about the risks of volatility inherent in crypto-currencies: “Individuals should avoid Bitcoin”.
Mark Haefele, who manages UBS Bank’s investments, said the group did not intend to use this type of investment vehicle.
Axel Weber, Chairman of the Supervisory Board of UBS, said he was “extremely cautious towards Bitcoin”.
The Swiss National Bank was concerned about the emergence of Bitcoin and other crypto-currencies.
Mario Draghi, the current President of our Central Bank, doubted the real impact of Bitcoin on the “real” economy.
However, in recent months, there has been a kind of semi-confessed about-face in the financial community. The reason? Speculation. Everyone quickly understood the growing importance of crypto-currencies and the interest of individuals in them.
While last September, Jamie Dimon, President and CEO of JP Morgan Chase Bank, described Bitcoin as a “scam” and announced that it would “explode in flight”, a few weeks later he was forced to temper his comments: “I just have a different opinion than the others, I am not at all interested in this subject”. Why such a deceleration?
Essentially because the bank had to answer certain accusations for having carried out purchase/resale operations on certain cryptocurrencies….
We can see how banks and investment funds are now positioning themselves in the crypto-currency market niche that they were eagerly criticizing a few months ago.
The business community criticized Bitcoin for being hoarded, not “serving the real economy”. If for some people Bitcoins are today essentially hoarded (they do not circulate, they are stored for their future value), it should be remembered what role gold has played for years: that of a reserve of value, exactly as cryptocurrencies could be expected to do in the coming years. But the business community and especially governments and other consumer protection institutions (such as the AMF) also blame it for its volatility.
However, large funds and banks did not hesitate to speculate heavily on this asset class: as an example, at the end of December 2017, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchanges (CBOE) were able to offer their clients (individuals and institutions) Bitcoin futures contracts with, in particular, the possibility of “shortening” cryptocurrencies (i.e. betting on their decline).
We can draw our attention to the timing: the opening of futures contracts at least in December coincides in a particularly strange way with the vertiginous fall in the price in the days that followed:
From the opening of futures contracts, the most famous of the crypto-currencies unscrewed by 50% in just one month. A simple coincidence of the calendar, or manipulation of the financial community?
Benefiting from an unprecedented media effect, the most sulfurous of cryptocurrencies made so much attention at the end of 2017 that many individuals bought them. However, we can only be skeptical about the resulting variation: the “smart money” (the big banks, institutions and large investment funds that are very well informed), which make the rain and sunshine on the financial markets, did they take advantage of this sudden craze to be the counterpart of small individuals, selling as much Bitcoin as they could, causing the market to fall?
Unfortunately, this is unfortunately very often the case: during a bubble, individuals enter massively while large portfolios, managed by banks or investment funds, are aware that the economic cycle is about to end and therefore counterbalance taxpayers by “selling them back”. This can be interpreted by looking at the famous ‘’cycle of emotions’’, or ‘’cycle of market emotion’’ in English.
When markets fall, causing panic and investor confusion, fund managers are usually on the lookout. Warren Buffet, the stock market tycoon, used to say “you have to be afraid when everyone is greedy and be greedy when everyone is afraid” meaning that acting against individuals (and therefore with institutions) is often the right thing to do. Behavioral finance plays a decisive role in modern finance, and panic or crack movements generally represent ideal situations to enter a market, whereas on the contrary, situations of intense euphoria, such as Bitcoin at the end of 2017, must be avoided with the greatest caution… as many people who invested during this bubble can attest, which supports the banks’ statements that these assets are too risky!
However, everyone unanimously recognizes that Blockchain technology will have a huge impact on the global economy. This is why all players in modern finance are investing massively in the development of their own blockchain. The financial world and especially the big banks have understood that they must absolutely be “in on it” if this technology is really to be adopted globally in trade.
“We don’t know if it’s going to work, but if it works, we have to be there,” summarized a senior Goldman Sachs executive. Last February, the famous investment bank bought the Poloniex cryptocurrency exchange through its mobile payment investment subsidiary Circle. Yet this announcement has gone relatively unnoticed in the world of traditional finance.
What we have to understand is that Goldman Sachs did not directly buy the famous crypto-currency platform but one of its subsidiaries: a relatively clever way to avoid mixing the name of Goldman Sachs, a prestigious American investment bank, with the sulfurous and so criticized crypto-currencies.
Thus, we are witnessing a kind of roundabout merry-go-round in which it is well seen for the financial community to criticize what they cannot control while trying, slowly but surely, to enter a very lucrative world… away from the public eye.
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