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In December, Bitcoin prices soared to # $ 20,000, multiplying by twenty this year. This sparked rumors that the Bitcoin Mania was perhaps surpassing the Tulip Mania – which was spreading across the world wide web with a mixture of fear and excitement.

The 100% rise in Bitcoin prices during the first three weeks of December stirred regulators in the Asia-Pacific region as Japan, South Korea and Vietnam together accounted for 80% of Bitcoin. The head of the Japanese central bank has described it as "abnormal". The head of the Danish central bank took it a step further, calling it a "deadly" one.

The Central Bank chiefs of the United States, Australia and the Turkish Deputy Prime Minister were a little more diplomatic. "The heads of the central banks of the United Arab Emirates and Saudi Arabia have ignored it, but they have focused on testing a new digital currency based on the Blockchain technology, for cross-border payments.

Investors and regulators' various reactions to soaring Bitcoin prices were irreconcilable

Behavioral Economics

best explained by the 2017 Nobel laureate economist, Richard H. Thaler, who, by integrating the economics and psychology, explored the impact of limited rationality, social preferences and lack of self-control over individual ecosystems decision-making During his appearance in the Oscar-winning crisis film, "The Big Short (2015)" – sitting at a blackjack table in Las Vegas next to the beautiful pop star Selena Gomez, Thaler – encouraged by the piles of casino chips at his disposal – explained that a "classic mistake" of investors, is the error of the hot hand "think that everything that is happening now will continue to occur in the future. "

Therefore, when the flash price of Bitcoin collapsed. 22, losing more than 30% of its value in a day, investors who had developed false confidence in the face of soaring Bitcoin prices, began to sell them in panic, all over the world. -web. The flash crash erased $ 210 billion from virtual currency markets. He went bankrupt a South Korean virtual currency exchange after he was hacked for the second time. He has stopped trading in several virtual currency and futures markets, including the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) due to rampant commercial activity. And this has lowered the prices of all other virtual currencies along the way. Limited Rationalization

Thaler developed the theory of mental accounting, explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the same. the narrow impact of each individual economic decision on themselves rather than on its overall effect.

A few days before the price meltdown of Bitcoin, some virtual currency holders who had a dislike for losses – a phenomenon that Thaler called the endowment effect – began to profit virtual currencies by selling them.

For example, the co-founder of Bitcoin.com, one of the largest Bitcoin websites in the world, Emil Oldenburg, got rid of all his Bitcoins with the belief that D & # 39; Others would do the same when they would realize high in transaction costs the Bitcoin market was. And the founder of Litecoin, Charlie Lee, sold all his Litecoins to solve the "conflict of interest" in himself.

Social Preferences

Thaler's theoretical and experimental research on equity was highly influential and well regarded. He showed how consumer concerns about fairness can prevent companies from raising prices in times of high demand, but not in times of rising costs.

A few days before the free fall of Bitcoin, the CEO of North American Derivatives Exchange (Nadex), Timothy McDermott, in anticipation of the bearish evolution of the Bitcoin market, launched a new trading instrument, Bitcoin Spreads.

Bitcoin Spreads allowed an individual trader who was bearish on the Bitcoin price to bet against him in the short term, with limited risk guaranteed and with affordable capital requirements. With these guaranteed limits, a retail trader has been protected against losses outside of his comfort level in the volatile Bitcoin market, while taking advantage of the potential profit opportunities of price movements in the ceiling range.

To negotiate Bitcoin spreads at Nadex, a merchant had to make an initial deposit of at least $ 250, without having to pay a minimum balance thereafter. Given that Bitcoin spreads were retail-oriented, it was smaller at $ 0.10 per point, compared to $ 1 or $ 5 per point with Bitcoin futures recently quoted at the WEC or at the US. CBOE.

Lack of Self-Control

Thaler showed how to analyze self-control problems using a planner-maker model, to describe the internal tension between long-term economic planning of a person. investor and short-term action. According to Thaler, an investor could avoid succumbing to short-term temptation by pushing – a term he invented – to exercise better self-control when making economic decisions

Too often, traders have impulsively traded Bitcoin or Spread binary options with little or no understanding of these products, costs, or risks as a reflex response to fluctuations in Bitcoin market prices on unregulated online trading. . This resulted in material damage to the financial profiles of these traders.

In response, the US Federal Bureau Investigation (FBI) issued a warning warning the public against unregistered binary options websites as tools for committing fraud and said that these exchanges were crucial. The European Securities and Markets Authority (ESMA), with the support of the Financial Conduct Authority of the United Kingdom, has announced that it is considering measures to "prohibit the marketing, distribution or sale of 39 bitcoin binary options to retail customers ". Australia, Belgium, Canada and Israel have banned the marketing, distribution or sale of binary options to retail customers.

Bitcoin Binary Options and Spreads are authorized by retail investors in the United States. Commodities Futures Trading Commission (CFTC) authorized exchanges: NADEX and Cantor Exchange.

This story does not stop at retail investors who make a killing by swapping Bitcoin bear spreads in Nadex in reaction to Bitcoin's flash crash, I'm sure. I'm scared.

Successful Bitcoin Bear Spread traders should keep in mind that the Internal Revenue Service (IRS) will likely characterize their Flash earnings as gaming revenue, and the number of dollars they earn. will impose under IRC 61. Because a player actively exchanges on an exchange Basing his game strategy on limited rationality, social preferences, lack of self-control or Feng Shui will be considered engaged in a trade or a case.

If the successful dealer is a non-resident alien, then his or her US gambling winnings from Bitcoin Bear Spreads – subject to certain exceptions – will be subject to a tax deduction of 30%.

If the retail broker suffers a Port Spread Bitcoin Bear earnings failure, he or she will be subject to information reporting and penalties related to accuracy.

Selva Ozelli