One Bank Believes It Found The Identity Of Who Is "Propping Up The Bitcoin Market"

Back in May when the Chinese domination over Bitcoin was ending, we predicted that it would shift over to Japan, specifically, we said that "just as the Chinese bubble frenzy in bitcoin is fading, it may be replaced with a new one, in which thousands of Mrs. Watanabe traders shift their attention away from the FX market and toward digital currencies" and added that "If the transition is seamless, there is no telling just how far this particular bubble can grow."

Judging by the exponential price surge in bitcoin in the subsequent period, we were clearly right on the latter, and now, according to a new analysis, we were also right on the former, because as Deutsche Bank reveals in a new report by Masao Muraki, "Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market" and who according to DB, happen to be more or less idiots, arguably because for the time being they are outperforming every other asset class... in history, to wit: "Japanese retail investors are less financially literate than their US peers across all age groups. Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors."

Ah yes, by contrast the financial literacy of the world's central-planners is off the charts. Look where that got us...

In any case, and without further ado, please meet the (rather boring) people who are propping up the Bitcoin market, at least according to Deutsche Bank.

Here are the details:

The identity of who is propping up the Bitcoin market

1. 40% of cryptocurrency trading is Japanese yen-denominated

An 11 December Nikkei report stated that 40% of cryptocurrency trading in Oct-Nov was yen-denominated. Japanese traders have reportedly come to account for nearly half of cryptocurrency trading since China started to shut down cryptocurrency exchanges, and this is said to be widely known among industry insiders (various estimates exist). This report shows that Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped) are driving the cryptocurrency market.

2. The true face of investors engaged in leveraged FX trading

“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. Following Abe and Kuroda, Watanabe may be the most famous Japanese name among market participants (although the purported creator of Bitcoin, Satoshi Nakamoto, is also famous). Japan accounts for a high 54% of global foreign exchange margin trading (leveraged FX trading) (source: Forex Magnate, 1Q2017), so Japanese retail investors are major players in FX markets. Data from GMO Click Securities which is the top company in its industry indicates that men hold 79% of FX trading accounts, and 63% of these men are aged 30-49 (as of end-September 2017; Figures 3-4). The typical Japanese leveraged FX trader is thus a man in his 30s or 40s and really ought to be called “Mr. Watanabe”.

As the speculative frenzy over cryptocurrency heightens, the spotlight is falling on the unique characteristics of Japanese retail investors. The Nikkei report mentioned above cited an example of a 38-year-old business man who invested ¥8m ($70,000) in Bitcoin, including his bonus. The average household income of a 38-year-old is about ¥6.1m, the average savings are ¥5m, and the average borrowings are ¥8.8m. This report was also a topic of conversation among the managers of Japanese financial institutions that I visited this week.

3. Financial literacy

How much financial literacy do retail investors engaged in leveraged FX/cryptocurrency trading possess? According to a survey by the Central Council for Financial Services Information (the Bank of Japan), Japanese retail investors are less financially literate than their US peers across all age groups (Figure 6). Compared to the US, financial literacy is particularly poor among people 35-54 years of age. The poor literacy of Japanese retail investors also stands out beside UK and German investors (Figure 7).

Before the FSA started applying pressure, the core investment products sold by banks and brokers were investment trusts with distribution yields above 10% (products with yields above 20% were particularly popular) that took compound risks and drew down principal (the typical purchase commission was above 3% and annual management fees were over 2%).

Figure 8 shows the top 3 reasons that Japanese retail investors engage in leveraged FX trading: 1) expectations of high returns, 2) they can easily invest in foreign currencies, and 3) many investors are earning profits. However Figure 9 shows that most investors say they quit leveraged FX trading because they did not do well (only 7.5% said they realized their profit goals).

More than a few Japanese investors positively value volatility. We have believed that “Japan is the Galapagos of asset management markets, pursuing its own path amid the long period of deflation. Japan’s investment style is typified by a combination of low-risk, low-return deposits and high-risk, high-return investments” (see our 11 December 2014 report, “Initiation: Securities firms confront changing "Galapagos market"”).

4. Investors’ winning percentage and turnover

New investors continuously enter the leveraged FX trading market and repeat the metabolism of being forced out by a margin call due to sharp market changes. This results in a market with a tumultuous annual participant turnover.

Leveraged FX trading is essentially a zero-sum game. Japanese retail investors are playing this zero-sum game with institutional investors engaged in algorithmic trading. It would be very difficult for business men trading on their smartphones during lunch or after work to sustain their trade wins. In Figure 5, we equate increases in FX trading account margins with wins, and decreases with losses. Over the past 10 quarters, we estimate that wins to losses were basically even in six quarters, while significant losses dominated in four quarters.

5. From leveraged FX trading to leveraged cryptocurrency trading

We think that retail investors are shifting from leveraged FX trading to leveraged cryptocurrency trading. Firms such as the GMO Group and SBI Group are embracing the sense of urgency and starting to offer cryptocurrency trading services. Factor breakdown is difficult due to market variables, but leveraged FX trading has been sluggish since February 2017 (Figure 1).

Cryptocurrency has been trending up, so retail investors' unrealized gains are also rising. With few investors leaving and a steady inflow of new investors, the investor pool has been expanding. We believe that investors participating in leveraged cryptocurrency trading are typically Japanese men in their 30s and 40s who are engaged in leveraged FX trading (or who used to trade but have stopped). We think that the pool of cryptocurrency investors not using leverage is even larger.

6. Margin call risk and fail risk

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. During the Swiss franc shock in January 2015, many retail investors not only received margin calls but also incurred losses greater than their margin balances, because forced settlements couldn’t be implemented in a timely manner. This shows that investors can suffer losses which brokers end up booking as credit losses even with leveraged FX trading of developed nation currencies. 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.

7. Unrealized gains are also virtual

The National Tax Agency recently indicated that profits generated by the sale or use of cryptocurrency are classified as miscellaneous income in principle and are required to be filed in income tax returns. We think that many investors are hesitant to realize profits because, combined with other sources of income, these profits would be subject to income tax (up to 45% tax rate) and residence tax (around 10%).

The progressive taxation system means that the tax rate rises in keeping with income for a single fiscal year (on a calendar year basis). For investors thinking of taking profit in the near term, a rational tax trade would be to sell some holdings this year and the rest next year. In contrast, investors hoping that profits will be taxed as capital gains in future (20% tax rate; but we cannot see any movement towards this) may put off realizing profit.

8. Fair value of cryptocurrency

Cryptocurrency such as Bitcoin that have pure distributed systems do not have an underlying value like precious metals. Value is not guaranteed by an issuer because there is no issuer. The value of cryptocurrency is thus entirely based on the belief that it can be exchanged for goods or sovereign currencies (BoJ review of December 2015). While valuation of exchange rates between legal tender and cryptocurrency should be the vital factor, it is retail investors (including “Mr. Watanabe”) who are currently carrying out price discovery.

With a broader range of investors set to enter the market in 2018 and an increase in the ways to hedge (short selling), we expect to see the market's price discovery function being utilized. The CBOE Futures Exchange began offering Bitcoin futures trading on 10 December and the CME plans to start on the 18th (the US Futures Industry Association sent a critical letter to the Commodity Futures Trading Commission who self-certified new contracts for bitcoin futures products. The letter said that there has not been enough discussion on topics such as margin levels, transaction limits, stress tests, and settlement).

Rather than the cryptocurrency used for speculation, our focus is on the impact that distributed ledger technology (broadly defined as blockchain technology) can have on financial transactions and the business models of financial institutions. Furthermore, as speculation in cryptocurrency is growing to a scale that cannot be ignored, we plan to look more deeply into the potential impact on the market if the bubble should burst and the effect of concerns over this on regulations and monetary policy.


TheReplacement nope-1004 Thu, 12/14/2017 - 11:29 Permalink

It is not hard to look at exchange data and see which ones have the volume.  You can also figure out some information by looking at the blockchain, finding the biggest wallets, and associated number of transactions...  this is not new information.  Bitcoin is far from perfect but you should stop with the ignorant FUD.Gold is best. 

In reply to by nope-1004

nope-1004 TheReplacement Thu, 12/14/2017 - 11:52 Permalink

You can also figure out some information by looking at the blockchain, finding the biggest wallets, and associated number of transactions...  this is not new information. So from your very insightful information you post above, that will show me that they are all "30 and 40 year old Japanese men"?Fucking bigcoiners are all so lost in their unicorn world. 

In reply to by TheReplacement

wulf nope-1004 Thu, 12/14/2017 - 11:54 Permalink

Someday people will buy beautiful jewelry made out of buttcoin.Fine china will be gilded with buttcoin.Buttcoin's electrical conductivity will make it crucial for industrial applications. Can you see those fine gold-plated pins in your CPUs, GPUs, etc? Forget it, in the future they will be buttcoin-plated.Gold 2.0

In reply to by nope-1004

MEFOBILLS Bokkenrijder Thu, 12/14/2017 - 12:12 Permalink

Leverage means they are borrowing Yen to buy Bitcoins.  When bitcoin price collapses, the Yen loan still needs to be paid.  Debt overhang then drags the economy, as yens go on to service debt rather than buying goods and services.  Japan took it in the rear when BOJ gave loans to every Tom Dick and Harry (substitute Japanese names).  This then caused a property bubble, and after land prices collapsed, the "debts" remained.  Japan is still dealing with the 80's property bubble balance sheet (debt) recession.Stupid humans cannot learn.Arbitrage by leverage is a finance game. Finance is not the real economy.Private bank issuance of Yen, dollars i.e. bank credit, can and will be usurious as there are no guidelines.  In ancient Venice, before it was corrupted by our ((friends)), any issuance of a new loan - both creditor and debtor were examined to make sure debt relation was non usurious.  Modern humans are not necessarily smarter than the ancients.  We've actually lost knowledge.

In reply to by Bokkenrijder

vulcanraven MEFOBILLS Thu, 12/14/2017 - 14:31 Permalink

Reminds me of a guy I know who recently took a Paypal loan to buy Bitcoin...Paypal loans are directly tethered to your online sales and the only money Paypal makes on the transaction is a flat fee up front when you get approved, then 30% of each sale is automatically deducted towards the principal until the loan is paid in full. He runs an online sales business and his profit margins on most items are about 10-15% so it doesn't take a math genius to realize that while this loan is outstanding, his business is making exactly zero dollars in profit. It is actually costing him money to sell inventory, some people are throughly hopeless.

In reply to by MEFOBILLS

E5 Five Star Thu, 12/14/2017 - 11:33 Permalink

The wall is meant to keep us in.Too many people born after 1980 who haven't got a clue as to what the Eastern Bloc and USSR were.  They were "free" healthcare, Blindly loyal, Free food and housing for all.... kids today have been raised believing if you can print money, everyone will be able to get these things.ugh.  Kruschev was right.  We fell to communism from the inside.They will gun you down for your unpatriotic desire to leave.

In reply to by Five Star

zebra77a J S Bach Thu, 12/14/2017 - 09:59 Permalink

Don't buy it.  No forex broker has $200 Billion lying around for some Japanese men to trade, nor the credit facility.. This went major league some time ago. Think CB, or several CB's..But considering the Japanese Central Bank owns 70% of the NIKKEI, having them realize they needed to gain market share of Bitcoin incase it becomes the World Reserve Currency is a wise move on their part.When the Federal Reserve and Central banks of the world start competing into Bitcoin as insurance just incase it becomes the World Reserve Currency stand back!! This things going to $1 million a coin to start!.. I highly do estimate that more than one central bank is buying this, triggering a global race into controlling crypto while getting media dogs to attack it on an ongoing basis..  When you have Ctrl-P powers how can you let one CB have all the fun... 

In reply to by J S Bach

zebra77a arkel Thu, 12/14/2017 - 10:38 Permalink

Japan is super-pro bitcoin, licensing all kinds of exchanges.. They get it's better to let bitcoin capital collect under their wing than have it flee to the next offshore haven.  Having $300 billion (in one year  expect $1 Trillion) flow into your locally planted exchanges while they collect their 0.5% - 1% commission is a BIG economic boost to your economy and makes your the 'Swiss Bank' of crypto..  GDP is GDP is GDP.  Digital Crypto-Capital will flow (quickly) to the exchanges that are least controlled and least taxed.  Digital Crypto-Capital is it's own ecosystem growing constantly - it cannot be stopped as it will jump regulatory bodies going to the next location that allows it.  It can be in Japan today and in the Cayman Islands in a month if they try to stop it...Cayman Island Bitcoin Dealers (that escalated quickly).. It's smarter to fully recognize crypto in good faith and hope people report their income gains back to fiat than to monkey-hammer your crypto exchange (coinbase) and have your citizens go black box on you, and watch the rest of the world adopt it.. 

In reply to by arkel

11b40 Bay of Pigs Thu, 12/14/2017 - 19:11 Permalink

In a view from 35,000 feet, Japan has been a time bomb for 30 years.  What was being discussed is their embrace of this new technology, and the opportunities there to take advantage of.  As the article makes clear, those FX trades are not working so well anymore.  I see them a a big laboratory that I want to watch, and the original poster summed up the current situation pretty well.

In reply to by Bay of Pigs

silverserfer Bay of Pigs Thu, 12/14/2017 - 12:54 Permalink

id have to agreee with zebra77a a bit on this.. CB objective is to control finacial markets. Of course they are going to take over crypto if it wasnt already their own secretly funded creation to begin with. they are smart enough to underrstand that crypto is the future of money but they need the masses to be fooled into believing that its theirs and they are free of the banks by owning cryptos. My theory is they want the mining infastructure to be built unwittingly by the masses. the network that is being built is their secreet entryway into every nook and cranny of peoples financial space. not no mention the same processes that are running the mining are also similar to the aritifcal intelligence chips being made and used in numerous applications. There is a plan for this thats not out in the open. 

In reply to by Bay of Pigs

zebra77a silverserfer Thu, 12/14/2017 - 13:13 Permalink

With 16 Million early adopters of Bitcoin, and ASIC miners located in 20 countries, does anything honestly think a single central bank can control Crypto?It forces a race condition, as GDP escapes fiat economies into the black box of Crypto the Central Banks have three options available to them to attempt to gain some control of crypto..A. Buy it before a competing central bank does. (Clearly with $300 Billion in Market Cap outpricing even Warren Buffets and Bill Gates they are already fighting amongst themselves to buy it - while naturally denying it all the way..)B. Mine It. China :…. Shut down the internet (only an apocalyptic option). 

In reply to by silverserfer

11b40 zebra77a Thu, 12/14/2017 - 11:44 Permalink

Bingo!Countries can't even work out trade deals among themselves.  How can all the governments unite to stop cryptos?  There will always be some countries looking for advantages over others, or ways to weaken others.  Plus, we are VERY early into this revolution.  Yes, there has been exponential growth, but only a tiny fraction of the world's population is participating.  The growth trajectory will continue unless governments figure out how to stop it ASAP.  The longer they wait, the harder it will become, as evermore citizens have skin in the game.  Pulling the rug out from under a few tech savvy early adopters is one thing.  Destroying the accounts of a large number of citizens across a big cross section of society will be very painful for politicians.

In reply to by zebra77a

greenskeeper carl 11b40 Thu, 12/14/2017 - 14:27 Permalink

How can all the governments unite to stop cryptos? Thats a little different than their usual bickering and trying to get one over on each other. In this case, its not that hard to imagine them uniting to destroy something that threatens them all. Once thats done, they can all go back to business as usual, i.e. trying to screw each other over. Or, in practice, screwing their own citizens over.

In reply to by 11b40