Bitcoin rallies, records and lawsuits

After a tumultuous week, triggered by the calling off of a fork to improve bitcoin's transaction processing times and reduce fees, the cryptocurrency has reclaimed the $7,000 mark to now trade at $7,495 on the Coindesk bitcoin price index. And it's not just bitcoin that is in rude health – the entire cryptocurrency market has reached a record valuation of $219 billion. Also, the second-largest cryptocurrency by market capitalisation, Ethereum, has broken out of its trading range around $300 and is up 10% at $330.

Over the weekend, bitcoin at one stage hit a low of $5,600, with rival Bitcoin Cash (BCH) climbing ever higher to touch $2,600. Bitcoin Cash's day in the sun was not to last. No sooner had it reached its all-time high early Sunday morning, it fell sharply, losing more than $800 in value within minutes.

The dramatic sell-off is thought to have been triggered by problems at the Korean exchange Bithumb, which accounts for about half of the trading volume in Bitcoin Cash. Outages at the site led the popular coinmarketcap.com site to stop taking prices from the exchange, which brought out the sellers.

Getting the law involved

Three thousand customers of Bithumb have now launched a class action lawsuit against the exchange, seeking damages for losses incurred in the two-hour period that the exchange was down. Given the lack of regulation in the sector, the plaintiffs may struggle to get redress for their claimed losses, or indeed to prove that they did in fact incur losses.

At its high point, BCH was worth 50% of the value of bitcoin. This remarkable turn of events was also reflected in the hashing power on the respective networks, with data showing BCH, for the first time, overtaking bitcoin in the number of computers working on the system.

During BCH's rise, unconfirmed transactions built up on the bitcoin network, with an average fee of $10 being required to push transactions through. Those not paying high enough fees could find their transactions stuck in the "mempool" as miners picked the high-paying fee transactions in preference. By contrast, transaction fees on the BCH chain are measured in cents.

At one stage, there were 117,000 transactions waiting to be processed. The situation has now eased somewhat on the bitcoin network as miners return from their BCH diversion, with unconfirmed transactions reduced to 59,000 (https://blockchain.info/unconfirmed-transactions ).

Bitcoin Cash's run is well and truly over, with the price hovering just above $1,000, having fallen 16% in the past 24 hours.

Bitcoin Gold, which forked from the main chain a couple of weeks ago, launched on Monday. The price initially shot up to $496, but has declined ever since, and now trades at $175. Bitcoin Gold has a larger block size than bitcoin but differs from Bitcoin Cash in that it has been tweaked to prevent ASIC miners – who use powerful chips specialised designed to mine bitcoin – from working on the network.

Bitcoin Gold's launch was initially held back because of the lack of stability and security of the code.

Regulator's warning

The mushrooming popularity of cryptocurrencies has caught the attention of the Financial Conduct Authority (FCA), which on Wednesday issued a consumer warning about the high risk involved in trading cryptocurrencies with CFD brokers.

Among other things, the FCA highlights the price volatility of cryptocurrencies and the leverage that CFD brokers allow their clients to trade with, which together is a potentially dangerous cocktail. CFD brokers are regulated by the FCA, but this does not prevent firms in the sector allowing clients to trade on margin of up to 150x. That level of leverage in combination with the huge price swings common in the crypto world could lead to a dangerous situation developing for both the companies themselves as well as their clients.

And with an eye to such dangers, the chairman of Interactive Brokers Thomas Peterffy, arguably one of the world's most successful derivatives trader, published an open letter to the Commodity Futures Trading Commission chairman J. Christopher Giancarlo on 14 November, imploring the regulator to insist upon the separation of cryptocurrency from the rest of the market.

"This letter is to request that any clearing organization that wishes to clear any cryptocurrency or derivative of a cryptocurrency do so in a separate clearing system isolated from other products," the letter stated.

Peterffy worries that cryptocurrencies "do not have a mature, regulated and tested underlying market", and their extreme price movements could destabilise the exchanges and even threaten the financial system. His warning does not beat about the bush:

"Unless the risk of clearing cryptocurrency is isolated and segregated from other products, a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy, as critical equity index and commodity markets cleared in the same clearing organization become infected."

It's the future

Perhaps in anticipation of such problems, CME Group, which announced last month that it will be introducing bitcoin futures trading, said it will set limits on price movements for bitcoin. If the price moves more than 20% above or below the previous day's settlement, trading will not be allowed.

The CME bitcoin futures contract will be cash settled, which means that holders of the contract at expiration will not have to take delivery of the underlying asset as they would with a physical commodity contract.

As a result, the price of bitcoin will not be affected by the futures market because when the contract is settled, instead of taking delivery of bitcoin, the contract holder will receive the cash value "by reference to Final Settlement Price, equal to the CME CF Bitcoin Reference Rate (BRR) on Last Day of Trading". The trading day for the futures will end at 4pm London time and contracts will expire on the last Friday of the contract month.

According to CME chief executive Terry Duffy, the bitcoin futures contracts could start trading as soon as the second week in December.

Bitcoin cards and Zimbabwe boom

In other news, a new crypto exchange is launching in December. UK-based London Block Exchange will offer sterling to Bitcoin, Ethereum, Ripple, Litecoin and Monero trading. It will also be launching a debit card called Dragoncard, which its customers will be able to use to convert their cryptocurrency into sterling.

There are other crypto-fueled debit cards on the market but they typically only provide conversion from bitcoin, as is the case with UK-based bitcoin debit card provider Wirex. Dragoncard conversion is automatic as opposed to the user having to convert their bitcoin into fiat currency and then use that to credit their debit card.

The military coup in Zimbabwe has widened still further the price differential between bitcoin prices quoted in the country and those in the rest of the world. On the Zimbabwe-based Golix exchange, bitcoin is currently valued at $11,950, which represents a $4,500 premium over the price on the Coindesk bitcoin price index.

Taking advantage of the arbitrage opportunity is problematic, however, because of the dollar shortage in the country and the necessity of having access to a bank account in the country.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.