Cryptocurrency trading just got a lot more appealing for professional traders.
Coinbase, the most well-known U.S.-based cryptocurrency exchange, Monday announced margin trading on its institutional trading platform, Global Digital Asset Exchange (GDAX).
The service, available for bitcoin, Ethereum, and litecoin, gives customers access to additional funds to make trades three times the size they typically could — a strategy that could compound their gains, but also their losses.
It also gives these investors, who are typically hedge funds, proprietary trading firms, high-net worth individuals, and family offices, the ability to “short” trades, or profit from dips in the value of these currencies.
“We’re the first and only exchange to offer a product that meets the requirements of these professional and institutional traders having accounted for state and federal regulatory requirements,” says Adam White, head of GDAX.
Courtesy of GDAX
GDAX launches margin trading
It’s a fitting milestone for a cryptocurrency startup that is one of the most well-capitalized in the space with $117 million in funding from backers such as the New York Stock Exchange, Andreessen Horowitz and others. It also, early on, made a conscious decision to break from its peers and comply with financial regulations, a path that was more costly but ultimately gave them credibility with institutional players cautious about experimenting with cryptocurrency. (Read more about Coinbase’s trajectory in my magazine feature on the company.)
As an example of how the new offering follows regulations, the exchange is not charging interest or fees to access margin trading, believing that doing so would constitute consumer lending, which requires specific 50 state-level, money-lending licenses.
Margin trading is one feature long requested by GDAX’s customer base. In the U.S., it will be available only to eligible contract participants, a specific category of people defined by the Commodity Exchange Act who meet certain wealth requirements. Outside of the U.S., all types of investors can engage in margin trading, and GDAX hopes someday to offer it to all U.S. customers.
The product — and even more broadly, exchanges like GDAX — are likely to benefit from the SEC’s decision earlier this month not to approve the Winklevoss bitcoin exchange-traded fund (ETF), which would have given investors an easy way to gain exposure to bitcoin in their portfolios. Since the agency cited the lack of investor protections in the cryptocurrency space as its reason for declining to approve the ETF, similar filings currently underway at the SEC are likely to be rejected as well.
Since the Winklevoss decision, daily bitcoin trading volume has been about 33% higher, but on GDAX alone, the increase has been 66%.
“The institutional traders that were holding off, waiting for an ETF to be approved, are saying, ‘It’s probably not going to happen. If I want access to this new asset class I’ll have to go directly to bitcoin spot exchanges,’” White says, “and the only exchanges these institutional traders are going to go to are the ones like GDAX that are based in the U.S., with an impeccable record, the trusted and secure exchanges that meet these regulatory requirements.”
Laura Shin hosts the Unchained podcast (Google Play, iTunes, Stitcher, TuneIn) and wrote The Millennial Game Plan. Disclosure: I own some bitcoin and ether.
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