Are Brokers Ready For The Next Bull Market?

Updated 30.03.2020
Are Brokers Ready For The Next Bull Market?

As we are seeing a downturn in the economy, companies are expecting to see a rapid influx of new users. In this article, you will understand what you will need to do to prepare your company for the new bull run.

What’s The Economic Impact Of The Coronavirus?

The World’s economy is suffering COVID-19 pandemic consequences. According to the Center for Strategic and International Studies Chinese economy is worse than originally estimated: China automobile sales decreased by 80% and exports sank by more than 17%. China’s first-quarter GDP is predicted to drop for the first time since 1992.

China is the first but not the only one to suffer economical aftermath of the spreading virus. S&P 500 is down more than 32% since its peak on February 19th while Euro Stoxx 50 is down 35%.

Many countries are trying to introduce measures of dealing with the recession and the virus outbreak. Japan has issued a $9.6 billion emergency package to support businesses, who suffered from the virus’s consequences. Trump’s administration is considering injecting $1 trillion into the economy while issuing $250 billion worth of checks to the population of the US. South Korea has announced a $13.7 billion stimulus package in the middle of March that would support healthcare and small and medium businesses.

Where Does The Money Go As Investors Click “Sell”?

Investors are rapidly transferring their assets into safe havens such as U.S. Treasury bonds, which has lead to all-time low yields.

Despite the recent drop in bitcoin price, experts consider it a safe haven as well.

“I still see BTC as a safe haven asset when the fundamentals come back into the market”

stated Denis Vinokourov, head of research for cryptocurrency exchange & institutional brokerage Bequant.

This means that it is likely that cryptocurrency markets are going to rebound quicker than the stock market as investors pull their holdings from the stocks and look for a safer place to transfer them to during the economic downturn.

Demelza Kelso Hays and Mark J. Valek in their crypto research report comment on the bearish trend in cryptocurrencies that has started in early 2018:

“From an economic point of view, this is positive: after a bubble, only a crash can lay the foundation for new, sustainable growth.”

They believe that a new and stronger bull run will come soon, however, they also admit that no one knows how long it will take as this asset class is very new. Demelza Kelso Hays and Mark J. Valek suggest following the actions of big players closely.

People Finally Know What Bitcoin Is

Bitcoin was created 11 years ago and has slowly been growing in popularity. Now, there’s a huge interest in cryptocurrencies among individuals, organizations as well as governments.

“The idea of having an alternative to traditional fiat money is attractive, especially today, when major currencies’ savings value is in jeopardy and the trust they require to work is declining. Central banks are no longer focused on their duty to protect money’s value and have instead bowed to the pressure spendthrift governments have put on them to finance oversized public debts.”

says Princess Gisela von und zu Liechtenstein.

There’s no need to explain what bitcoin is anymore. Most people have heard about it.

US universities hold their income and donations in endowments. Although most of the universities are still skeptical about investing in cryptocurrencies, many of the elite universities such as Stanford, Harvard, MIT, and Yale have already done so. Yale has, for example, invested in Paradigm Fund, founded by former Coinbase, Sequoia, and Pantera Capital employees. It is, however, unknown how much of their $30 billion Yale has invested in this fund.

This is one of the examples of the trust that cryptocurrencies have been getting lately. People are expecting to see a bull run, they have their money ready and just waiting for the right trigger. Also, the overall attitude in the media towards bitcoin has significantly improved since the beginning of Crypto Winter.

Crypto Winter has definitely had a positive impact on the industry. As this study shows, over 80% of ICOs in 2017 were identified as scams. However, they were wiped out by the “winter”.

“Overall there are some really good signs that the crypto winter washed out most of the scams”

expressed his opinion Emin Gün Sirer, the co-director of the Initiative for Cryptocurrencies and Smart Contracts.

Crypto Winter is over and there’s a bright future. As Deloitte’s 2019 Global Blockchain survey states, 53% of companies admit that blockchain is a critical priority for them.

Are Crypto Trading Platforms Prepared?

When Bitcoin reached its all-time high in December 2017, Coinbase was signing up more than 50,000 new customers every single day. The platform reached its monthly active user’s peak the next month, when 11.1 million people used Coinbase in January 2018. Coinbase is a good metric for measuring the popularity of cryptocurrencies as 47% of crypto traders use Coinbase according to this study.

Research firm Glassnode suggests a strong correlation between the number of bitcoin holders (Entities) and the price of bitcoin. They have calculated the number of bitcoin holder rather than the number of wallet addresses because:

  • ✔ One organization/individual can have multiple wallets
  • ✔ One wallet address, such as crypto exchange, can be used by many individuals

According to Glassnode research, if there’s a spike in price, there’s also a rise in bitcoin adoption. People start signing up for crypto exchanges and trying to capitalize on the bull market. The symptoms of infamous FOMO start appearing in society as everyone is going to try to take a bite of the golden apple.

The question is: are brokers ready for the next bull market run?

The rise of the bull run happened very quickly and if people tried jumping on board in November – December 2017, then they were forced to wait for weeks, and sometimes months, to get through the Know Your Customer (KYC) process while creating accounts on crypto trading platforms. If a new and more powerful bull run will start tomorrow, chances are that most of the crypto exchanges will not be able to handle the influx of new users.

The situation can get even worse because the COVID-19 pandemic is not anywhere near the end, which means that most of the compliance and AML officers will be home during the spike.

The Quality Of KYC

Cyphertrace research has found that out of 120 most popular cryptocurrency exchanges, two-thirds have a weak or porous KYC system in place. Moreover, 63% of exchanges, which trade privacy coins (coins that conceal the transaction data), also have weak or porous KYC practices, making it hard for exchanges to survive further FATF regulations.

  • ✔ A weak system indicates that 0.25 BTC could be withdrawn daily with little to no KYC.
  • ✔ A porous system means that exchanges require some sort of ID verification but no proof of address or more detailed data.

What About Stockbrokers And Trading Platforms?

If we take a look at S&P 500, we will notice that on average bull markets last for 4.5 years, however, the most recent one lasted for almost 11 years. The shortest bear market happened in 1990, where prices dropped 20% over the period of only three months. However, bear markets can last very long as well. The longest one ended in 1942, lasting 61 months!

A lot of people have been waiting for the dip for many years to enter long positions. After the bear market ends, we can expect to see a lot of new traders and investors as well because people will observe a rapid rise in the economy after the recession is over. Many of those people are millennials who only now start thinking about long term investments.

Banks, brokers, and stock trading platforms have to be ready for the possible influx of new users. They should be proactive and start setting up the necessary systems in place for the smooth digital onboarding of new customers.

How To Prepare?

  1. Check out this checklist for building a great KYC process.
  2. Decide if you want to hire and train new compliance officers or outsource. Outsourcing KYC to companies who specialize in eKYC is usually cheaper, faster and more reliable. Also, it will help you avoid COVID-19 as you won’t need to have anyone in your office.
  3. Choose an eKYC provider. Here you can read about the different aspects you will need to consider.
  4. Contact the eKYC provider and ask for a demo.
  5. Start using it.

It’s that simple. The integration of KYC widgets takes only a couple of minutes with providers like BASIS ID. They will handle your customer onboarding and all of the compliance questions, while you can be focused on providing a better solution for your clients.

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