When Deutsche Bank’s Global Financial Strategist Masao Muraki looks at the bitcoin market, he sees a market that is being “held up” by certain forces. In a December 14 research note titled “The identity of who is propping up the Bitcoin market,” Muraki and his fellow Japanese researchers Hiroshi Torii and Tao Xu not only profile who is holding up the market, but their motivations and what institutions might get hurt if the bitcoin market crashes.
Deutsche bank thinks a Japanese "Mr. Watanabe" in his 30s or 40s is holding up the bitcoin market
Playing the part of an FBI profiler, Muraki and his team want to know who is holding up the bitcoin market and why?
Looking at a December 11 Nikkei report that notes 40% of cryptocurrency trading during October and November was yen-denominated, they determine the primary geographic region of those trading cryptocurrencies as being from Japan, which also accounts for 54% of global currency trading. The Nikkei report notes that a meaningful percentage of those engaged in global foreign exchange trading have stopped their currency trades and moved to cryptocurrencies. What does this profile look like?
To answer the question, they look to the colloquial buzzword used among fellow bankers and certain media participants that also points to the motivation: “Mrs. Watanabe.” In Japan this refers to the archetypical Japanese housewife who invests the family savings. Deutsche Bank makes a few alterations to the urban slang definition and then applies a mathematical logic to determine who is propping up the bitcoin market.
First off, those holding up the bitcoin market are not a “Mrs.,” but rather a “Mr.” They have experience trading and have an appetite for oversized market returns, fitting an age profile looking for action and wants to make a mark in their life, as Deutsche Bank explains:
“Mrs. Watanabe” is a buzzword often used by US/European media and market participants to symbolize the typical Japanese retail investor who trades in FX. We think that retail investors are shifting from leveraged FX trading to leveraged cryptocurrency trading. The typical Japanese leveraged FX trader is thus a man in his 30s or 40s and really ought to be called “Mr. Watanabe”.
The report points out that this group of people also might not be the most sophisticated lot. “Japanese retail investors are less financially literate than their US peers across all age groups,” the report noted, pointing to a survey by the Bank of Japan’s Central Council for Financial Services Information. “Compared to the US, financial literacy is particularly poor among people 35-54 years of age.”
This group of leveraged FX traders likes the investment due to the expectation for high returns, the relatively high win percentage and the ease with which they can make trades.
From a cryptocurrency trading perspective, this group also has a problem that is holding up the market – and there are other problems that could spread like a contagion Deutsche Bank warns.
Bitcoin market: traders who sell will experience a significant taxable event
Cryptocurrency traders who started trading as early as October have likely booked significant gains. On October 1 the price of bitcoin was trading at $4,310, according to the World Coin Index. It now trades near $16,500 after peaking near $18,000.
What this means for those how invested in bitcoin is they could experience a significant taxable event if they sell.
Japan’s National Tax Agency recently noted that profits generated by the sale of cryptocurrency is to be categorized as miscellaneous income on income tax returns. “We think that many investors are hesitant to realize profits because these profits would be subject to income tax (up to 45% tax rate) and residence tax (around 10%),” the Deutsche Bank report speculates.
But when selling does occur it could be a meaningful event for not only the highly leveraged bitcoin traders, but also their brokers.
Leveraged cryptocurrency trading services are available in Japan. Some major FX brokers are using the same 25x leverage limit that applies to FX trading, but there are no direct rules in leveraged trading of cryptocurrency. Authentication of Bitcoin settlements takes at least 10 minutes. The risk of incurring losses greater than margin is higher than in normal FX trading, due to high intraday volatility. As a result, we believe that brokers also face a higher risk of failure.
Pointing to the Futures Industry Association’s recent letter to the Commodity Futures Trading Commission that raised issues with the lack of discussion regarding bitcoin trading, they are concerned the day may come when a bitcoin crash causes a ripple throughout the brokerage industry. This is the ultimate concern caused by Mr. Wantabe’s leveraged ambition.
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