Weekly Newsletter dated June 2, 2016

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Currently there are no big news in the market. Investors are still waiting for the Brexit vote later this month (Brexit) and for the U.S. Fed (Marktes and interest rates Blog) which is waiting for the right moment to hike interest rates again.

Bitcoin

While everybody is waiting we take this opportunity to take a closer look at Bitcoin. If you also believe this is just a temporary phenomenon for some computer nerds you might prove wrong. While there are some alternative digital currencies and Bitcoin has experienced some drawbacks it’s big, it’s coming and it is real.
See also our chart of the day.

Fortunately in Wikipedia a definition of Bitcoin is in simple English available: ‘Bitcoin is a digital and global money system (currency). It allows people to send or receive money across the internet, even to someone they don’t know or don’t trust. Money can be exchanged without being linked to a real identity. The mathematical field of cryptography is the basis for Bitcoin’s security.‘ See more details there on how it works.

Since Bitcoin is decentralized and anonymous it is very hard to control. It takes no central bank or similar institution. While some doubtful people might abuse anonymity it’s experiencing fast growing popularity far beyond this group. There are already more than 100’000 merchants accepting Bitcoin for products and services!

How does it effect investment business?

This could do not less than changing the whole financial system. Just think of current power of central banks that might become obsolete. Bitcoin has been introducing a whole new technology how to secure and distribute data: blockchain. Every user is allowed to connect to the network, send new transactions to it, verify transactions, and create new blocks which makes it permissionless.

According to a State Street research 74 percent of asset owners say they believe blockchain will achieve the scale needed for adoption. While a majority of asset owners and asset managers expect it to be widely adopted in the investment industry in the next five years, only seven percent currently have initiatives underway to support it.

Bitcoin Exchange

There is an unlimited number of exchanges like Coinbase or Kraken to buy virtual currencies such as Bitcoin. There is an increasing number of merchants selling real goods for Bitcoins. And there is even an exchange trading investment derivatives. BitMEX has been founded in 2013. So far, 5,800 users have traded $760 million on the exchange. The company is already profitable and expanding rapidly. Currently it has 90% of its customers in China who benefit from an access to global markets and leverage by financial derivatives offered on BitMEX. While BitMEX accepts payments in virtual currencies the investment derivatives still have a classic design like at the Chicago Mercantile Exchange.

Outlook

Erwin Lasshofer and his INNOVATIS team see a huge potential for a technological and financial revolution here. It is certainly big enough to be taken very seriously. It will change the way we pay and thus the financial sector. For the next few years we see no direct effect on the way we design structured products. However, we will watch this development closely and select underlyings accordingly.