The Japanese exchange at the heart of bitcoin’s recent surge has said its investors are fuelling the cryptocurrency’s feeding frenzy as they buy in with leverage up to 15 times their cash deposit. Yuzo Kano, bitFlyer’s chief executive, said in an interview with the Financial Times that the liquidity on his Tokyo-based exchange — which has an 80 per cent share of bitcoin trading in Japan and 20-30 per cent of the global market — was deep enough to handle even the biggest market movements. Bitcoin’s meteoric rise continued to shock markets last week as the currency soared another 50 per cent to hit new highs over $17,000. Wild trading saw different prices around the world: while the price was about $16,000 a bitcoin on Friday afternoon in Tokyo it fell to about $15,000 during the European day. “I think Japan is leading the market higher,” said Mr Kano. BitFlyer, which ranks third for trading in the underlying digital currency, has also won authorisation to open in the US. Activity on bitFlyer points to a market where large inflows of yen from leveraged Japanese investors are colliding with minimal supply of underlying bitcoins to force the price higher.
Mr Kano said trading on the exchange was “roughly 50-50” between existing investors and new money coming in. “The scale of deposits is steadily increasing. It’s pretty large,” he said. Most of bitFlyer’s customers are private individuals from big Japanese cities aged 20 to 50. “There are lots of traders but some buy-and-hold investors. Actually, they are buy-and-buy,” said Mr Kano. The platform also hosts a small number of foreign hedge funds and arbitrageurs who trade actively. Supply seems to come from Chinese bitcoin miners and a few early holders. “People who’ve owned them for a long time and have made a fortune. They have ¥10bn and they’re selling a little,” he said. Trading on bitFlyer is roughly 25 per cent in actual bitcoin and 75 per cent in derivatives, where customers make leveraged sidebets with each other on the bitcoin price. “We don’t take any risk. The trading is between our customers,” Mr Kano said. Arbitrageurs link the derivatives market to trading in underlying bitcoin. BitFlyer automatically closes client positions when they lose half their initial margin. For example, a customer who used ¥10,000 to buy ¥150,000 of bitcoin would be forced to sell if its value fell to ¥145,000, a drop of slightly more than 3 per cent.
His comments come as Cboe Global Markets launches derivatives on bitcoin on Sunday evening — the first US futures exchange to do so. Coinbase, an online bitcoin trading service, became the most-downloaded free app on Apple’s App Store charts over the weekend, suggesting appetite for the currency craze is still growing. One risk is that, in a market panic, there might not be enough buyers to close all the long positions, but Mr Kano said he was not concerned. “We have a huge amount of liquidity. No matter how big the position we can close it out. If bitcoin rose 20-fold in a day then I don’t know. But a day with a 30 per cent fall would be no problem.” Mr Kano hopes the technological sophistication and deep liquidity of his market will attract US customers, especially if regulators allow him to link Japanese and American traders. A former Goldman Sachs trader, he founded bitFlyer in 2014, when Tokyo’s ill-fated Mt Gox was still the world’s dominant bitcoin exchange. Following that fiasco, Japan moved to regulate bitcoin, opening it to the country’s gung-ho retail traders. BitFlyer is regulated by Japan’s Financial Services Agency and has raised $36m in venture capital from blue-chip backers including Mitsubishi UFJ, Mizuho and Sumitomo Mitsui banks. Some exchanges have recently lost bitcoin to hacking attacks. Mr Kano said that unlike many rivals, bitFlyer runs entirely on private, closed-source software, making it a harder target for intruders. It holds most bitcoin offline in a “cold wallet”. BitFlyer is also working on applying the blockchain technology that underlies bitcoin to the clearing and settlement system, an area Mr Kano said has greater long-run potential than his exchange. “Blockchain will change the world,” he said.