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Head of Sanlam UK: ‘It is not truly a currency but Bitcoin is a commodity’

Market Place — Tue, 11 May 2021 10:12:51 +0000

Mark Ward, head of trading at Sanlam UK, said: “What a Bitcoin (and its rivals) is, can be thought of just as virtual money, used to buy and sell items, as you would in a shop with a five pound note – they are simply a means of exchange – it allows barter to occur online, in a virtually fraud-proof way. Whereas a central bank stands behind and stabilises traditional currencies (in the past one could exchange notes for gold should you ask the Bank of England, and UK bank notes still contain a “promise to pay the bearer” from the UK government itself), there is no bank, corporation or government acting as a backbone to Bitcoin. This is why the value of cryptocurrencies are so volatile – its value derives from the confidence in the market that tomorrow, the Bitcoin will not be worthless, and it help us to understand why Bitcoin is a commodity.

“Bitcoin is not truly a currency, at least not yet, and is best thought of perhaps as a commodity. The Dutch Tulip Mania in the 1600’s saw the price of a special type of tulip bulb rise to more than the cost of a house with an acre of land in the Netherlands, yet the intrinsic value and usefulness remained essentially nothing. But, as with cryptocurrencies, if people decide something has value, then it has value, and only time will tell if Bitcoin is another tulip-mania in the digital world, or will deliver on its promise to displace central banks and hard cash as the primary means of exchange in the future.

“One question that we often get asked at Sanlam is – “I don’t know how to mine Bitcoin, I don’t actually want to use it as currency, but I want exposure to it”. The easiest way to gain exposure to Bitcoin would be via an Exchange Traded Fund (ETF). That said we do not recommend Bitcoin as part of an investment strategy, as it has many characteristics of a bubble and something that we view as purely speculative.

“As for the future of crypto-currency, it largely comes down to three factors: whether or not Central Banks and governments release their own versions and make them the only legal tender, on indeed officially endorse a crypto-currency like Bitcoin, whether or not transaction processing speeds up from the current average of four days, and if the price volatility can be stabilised.

“Whether Bitcoin falls to near-zero like the aforementioned tulip, continues to rise like diamonds have over the past century, or simply holds steady once the market finds the level it can tolerate, is anyone’s guess at the moment, but it is certainly one to watch as it becomes better understood by the mainstream.” That opinion show us that Bitcoin is a commodity

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A Trader’s Guide to Futures – Part 2

Market Place — Wed, 25 Feb 2015 07:00:09 +0000

In the first section of this guide we took a look at what a futures contract actually is, and how it works at a basic level. The second part of the guide will describe why exactly investors find them so useful and when they should be considered as an instrument worth investing in.

This part of the guide will give an overview of how the futures market works in aggregate, and why investors bother with it, leading on to Part 3 which will show how to assess and value futures contracts.

Why buy futures?
In part one the parties involved had their own goals. The farmer was looking to get some cash up front for his grain, the investor was looking to make a profit off of a prediction that the price of grain was set to rise. It’s important to remain on the safe side and avoid debt management by working with a professional like these insolvency practitioners London. This is one type of futures contract, but there are many different objectives and uses for such contracts. Below we list the two basic uses of a futures contract:

Hedging risks: Futures contracts allow companies and investors to stabilize the price of a volatile asset in the long term, reducing pricing risk. The airline industry is the most famous partaker of these type of contracts, with aircraft fuel constantly being fixed by various futures contracts.

In an industry highly cost sensitive to changes in a volatile asset this makes sense, though the recent drop in oil prices has many airlines stuck to contracts buying fuel way above current market price.

Instead of trying to guarantee the price of oil, some investors try to limit their downside from the bond market by investing in instruments like interest rate swaps. This means that, instead of fixing a price, the risk of losses on certain investments is lowered. This principle can be applied all over the capital markets.

Speculation: In order to take advantage of predictions about future prices, futures are often the best way to get exposure to a commodity and increase exposure using the leverage discussed in Part 1. Speculators, like our grain investor, try to make money all the time by betting on the futures markets.

In fact, all short contracts on stocks and bonds are a kind of future that work in this way. An agreement is made to sell stock of United Company Group at $10 in six months. If the price at that date is $8, the seller is able to make $2. Famous short sellers, like hedge fund managers, do this with millions of dollars at a time.

Who buys futures?
Because of the immense variety of markets that futures are available in, a vast cross section of market players are involved in buying and selling them. From companies that want to fix the price of commodities to hedge fund managers that want to short a company, to a bank that has taken on too much risk in a certain market.

Because of this, basically everyone but specialists trade futures. Commodity producers sell them in order to secure cashflow; market makers buy and sell them en masse in order to take a margin by selling them on, maintaining market liquidity; hedge fund managers buy and sell them against each other; companies hedge their costs on them; financial firms manage their risks based on them; the list goes on and on.

The whole futures market works together in this way in order to set prices for the foreseeable future, and gives a huge economic incentive to analyzing market trends in order to predict the future price of assets.

This means, because of the arbitrage dynamics, that today’s price is more representative of the market’s expectations for the future of a certain asset. The market can, of course, be wrong, but it offers a kind of price stability and predictability that allows both investors and normal companies to operate.

The next section of this guide will concentrate on how exactly you can trade futures, and what the steps are to set up your first trade.

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How Do Central Banks Affect Exchange Rates

Market Place — Mon, 09 Feb 2015 17:00:56 +0000

We all know that central bank decisions are some of the most influential occurrences on the forex markets, but how do the actual mechanics work? When the Bank of Japan lowers interest rates, the SNB stops buying Euros, or the ECB starts buying bonds, what’s going on?
Here we’re going to have a look at the basic mechanics that cause central bank decisions to hit the forex markets. The important thing to remember is that old solid Supply and Demand. Currencies trade based on this in the same way as any other commodity. Central Banks have to affect on, the other or both in order to change exchange rates.

Interest rate changes
Back before 2008 central bank’s simply wouldn’t attempt to intervene overbearingly in markets and interest rate changes were the only likely outcome of a meeting of the Federal Reserve. When the Federal Reserve changes its interest rate, it changes the relative benefit of keeping money in one currency instead of another.

If the central bank increases the interest rate, bank rates and bond rates in the United States tend to go up. If everything else remains equal the US dollar is more attractive to hold that the euro or yen and money begins to flow into the country’s investments.

Basically the price of the currencies with higher interest rates will go up until no more money can be made through simple transfers. On the financial markets, as you can see after major interest rate decisions are made, this happens almost instantly.

Direct market intervention
This is the actual buying and selling of currencies by central banks designed to influence exchange rates. At its simplest level it involves affecting the demand for one currency in another by central bank intervention. It can take several different forms in specific cases, however.

The best example in recent years has been the intervention of the Swiss National Bank which set the maximum exchange rate at 1.2 Franc to the Euro in 2011. The central bank kept its currency low against the euro by printing francs and using them to buy euros, meaning there would always be infinite supply of Francs at that level and none above it. Nobody is going to sell 1.3 francs for a euro when the central bank is selling them at 1.2.

This, of course, was risky for the Swiss National Bank and was a last gasp policy designed to reduce the impact of serious deflation brought on by a flight to safety during the financial crisis.

The other, more common side of direct intervention is propping up a currency: a practice Russia attempted sporadically through 2014. This involves buying your own currency with the central bank’s foreign currency reserves. This is an unstable practice that can result in the bank running out of reserves, and the weakening of the currency accelerating as a result.

Quantitative easing and other innovations
Less understood than direct intervention because of its novelty, QE involves printing currency in order to buy securities, i.e. bonds and equities. The US began doing this several years ago and was followed by the ECB, the BoE and the BoJ. The way it affects currencies is still debatable, but the central theory references two factors: increase in currency supply and lower interest rates.

Buying US treasuries at such a level means that yields fall substantially, lowering demand for the dollar to buy them in and having a knock-on effect on interest rates across the economy, and having the same effect, at one level, as a change in interest rates.

Increasing the money supply by such a margin, 60 billion euro in the case of the ECB program, every month creates a downward pressure on the price of the currency compared to others.

This has been the basic effect of easing programs in the US, Japan and the UK, but the ultimate result of the European program remains to be seen. Further study as central bank innovations keep popping up will result in greater understanding of these mechanics.

Predicting movement

The above gives an outline of the mechanics that central bank decisions drive on the market, but there’s so many factors affecting the supply and demand for currencies that none is a guaranteed bet. Take any currency chart and look at it through the last seven or eight years to get an idea of the unpredictable volatility that drives forex at certain points in time.

Knowing is half the battle, however, so getting used to the way that central bank decisions are made, and learning about these mechanics and the decision making apparatuses behind them will put you ahead of the average market participant and give you insight into the more complicated derivative results of central bank intervention.

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