This article is an excerpt from “Digital Gold: How Bitcoin Can Become a Mainstream Investment,” included in the Q4 2015 issue of the Finance Magnates Quarterly Industry Report.
Recent advances in the way we invest in bitcoin have had a profound effect in contributing to the newfound stability. Until recently, bitcoin trading has been conducted solely in unregulated marketplaces. This meant that price manipulation, “pumps dumps”, flash crashes and a variety of irrational behavior could take place, unpoliced and unimpeded. There were no assurances as to whether reported trades were conducted by real people, if the exchange was merely trading with itself, or if they ever happened at all.
This changed significantly in 2015. The introduction of virtual currency regulations i.e. the “BitLicense” in New York State has changed the way Bitcoin businesses can operate in the world’s financial capital. The regulations are highly controversial; they be loosely viewed as separating between the large, well-capitalized Bitcoin companies, some of which welcomed the regulations, and small startups, many of which opposed them.
Interestingly, only one Bitcoin company- Circle Internet Financial- has secured a BitLicense to date. Two bitcoin exchanges, itBit and Gemini, have exempted themselves from the regulations by securing trust charters, allowing them to operate as licensed financial institutions in all 50 states. Both exchanges target institutional clients, who may have been waiting on the sidelines of the Bitcoin race till now, with their venues.
Ryder Taff, Portfolio Manager at Ridgeland, Massachusetts-based New Perspectives, believes that the development of regulated bitcoin trading for institutions and the increasing stability are no coincidence.
“Institutional market participants will likely be more conservative, and behave in such a way to keep the price more stable. Institutions value stability and predictability and will bring that to the market. As much as bitcoin enthusiasts like to talk about putting the power in the hands of individuals, institutions will bring a lot of experience and resources to the bitcoin market. While innovative ideas do come from individuals, large organizations are the ones with the capability to implement new ideas,” he told Finance Magnates.
He suggested that the involvement of institutions in trading, at least for now, would be relegated to activities carrying a minimal level of risk. “Much of the institutional activity in bitcoin will likely be low risk market making activity for the time being (again, contributing to stability),” he said.
itBit, originally based in Singapore, moved to New York specifically to come under the umbrella of regulation, which it was preparing for well before BitLicense rules were even drafted. It brought on board a number of former regulatory officials and invested heavily in becoming compliant with whatever regulatory framework would emerge.
Gemini was founded by Tyler and Cameron Winklevoss, early bitcoin investors better known for the legal spat with Mark Zuckerberg over intellectual property rights to Facebook. They hired top security and regulatory talent to build a New York-based bitcoin exchange geared toward conventional investors. “Everyday we are onboarding more and more traditional financial institutions who are only willing and able to work with regulated bitcoin exchanges,” Cameron told Finance Magnates. “The ‘institutionalization’ of bitcoin trading is most definitely happening as we speak.”
The Winklevoss twins previously applied to launch an exchange-traded fund (ETF) that would track bitcoin’s value as traded on various bitcoin exchanges. The ETF would be listed on Nasdaq under the symbol COIN. However, the product has been pending approval from the US Securities and Exchange Commission (SEC) for over two years.
This article is an excerpt from an analysis included in the Q4 2015 issue of the Finance Magnates Quarterly Industry Report. To get the full article and other research products, contact our sales team at: [email protected]