Bitcoin needs \u201cDowntown\u201d Josh Brown more than he needs bitcoin. Brown, the chief executive officer of\u00a0Ritholtz Wealth Management and author of a popular finance blog, has long been skeptical of the digital currency. He finally bought some, he said, \u201cbecause the goddamn thing won\u2019t go away.\u201d<\/p>\n
Still, Brown, who helps manage half a billion dollars, isn\u2019t really a convert quite yet, especially when it comes to security measures at bitcoin exchanges. He researched several before buying his bitcoins at Coinbase Inc. and wasn\u2019t impressed, he said in an interview. \u201cI don\u2019t think any one service is safer than another. It\u2019s too early to anoint any of them as the JPMorgan of bitcoin. I don\u2019t think that exists.\u201d<\/p>\n
Such concerns are the biggest obstacle to growth in the market for cryptocurrencies like bitcoin or ether, the second-biggest. Even as investors are lured by their price gains and volatility, the biggest institutions are reluctant to get in, raising further concerns about liquidity. The challenge for exchanges like Coinbase and Gemini Trust Co. is persuading major financial players that the $121 billion market for digital assets meets 21st Century standards.<\/p>\n
The dangers are apparent. On June 21, ether crashed to 10 cents from $317.81 in trading on Coinbase. The cause was a single $12.5 million trade — one of the biggest ever — that triggered further selling. It all happened in just 45 milliseconds, after which computer algorithms started buying, driving prices back up to $300 within 10 seconds. Some digital coin exchanges have collapsed or customer funds have disappeared. All of which is scaring away the very investors the exchanges need to succeed.<\/p>\n
Read More: Bitcoin Was Cool, But Its Blockchain May Be Useful<\/p>\n
Cumberland Mining, a unit of Chicago-based high-frequency trading firm DRW Holdings LLC, handles many big orders privately \u201cbecause the exchanges and other marketplaces can\u2019t handle that type of liquidity or don\u2019t have that type of liquidity,\u201d said Bobby Cho, a cryptocurrency trader at Cumberland. \u201cThe marketplace is so fragmented that liquidity is fragmented.\u201d<\/p>\n
At the heart of bitcoin trading stands the blockchain, a so-called distributed ledger that is also touted, loudly and often, as a cure-all for markets that would speed up clearing, eliminate costly delays over disputed trades and reduce capital costs for banks. The hype, however, sometimes outstrips the reality.<\/p>\n
When Brown bought his bitcoin, he was unaware that the purchase wasn\u2019t secured on the blockchain, that it was only held internally at Coinbase.\u00a0That puts extra pressure on markets to maintain security to thwart hackers and thieves. After Brown wrote about buying bitcoin on his blog, \u201cPeople were screaming at me, \u2018Coinbase is not for storage!\u2019\u201d he said. In response, a friend helped him set up a wallet to hold his bitcoin that is secured by the blockchain.<\/p>\n
\u201cIt\u2019s the Wild West, it\u2019s very much early days still,\u201d said Richard Johnson, a market-structure analyst at Greenwich Associates who specializes in blockchain. Johnson agreed that the time and complexity of moving digital currencies from one exchange to another is \u201cnot acceptable\u201d given how modern investors operate, and that while Gemini, Coinbase\u2019s GDAX and other U.S.-based exchanges have strong know-your-customer procedures, more needs to be done. \u201cIf people want to get serious about this for real banking transactions, it needs to be better and easier to use.\u201d<\/p>\n
Investment money continues to pour into digital assets. Coinbase said Thursday that it received a $100 million investment from a group led by IVP. It plans to use the money to expand its engineering and customer support staff, open a New York office for its professional trading platform GDAX and grow Toshi, \u201ca mobile browser for the ethereum network that provides universal access to financial services,\u201d said Megan Hernbroth, a spokeswoman.<\/p>\n
Adam White, general manager for GDAX, said the company only allows fully collateralized trading and should be thought of as a spot market. That means if a Coinbase user doesn\u2019t have the cash to cover the whole trade, it doesn\u2019t happen.<\/p>\n
\u201cWhat we\u2019ve been very good at is preventing people from fraudulently buying digital currency,\u201d he said in an interview. \u201cWe\u2019re doing hundreds of trades per minute, and we immediately settle and clear all those trades on our platform,\u201d he said. \u201cThere\u2019s no need to post those to the blockchain.\u201d Coinbase is regulated by New York State under its BitLicense program, which among other things requires registration by any company \u201cperforming exchange services as a customer business,\u201d according to the state website.<\/p>\n
Coinbase has also acquired about 35 money transmitter licenses from U.S. states that require them, White said. The exchange acts as a custodian to many of its users and stores several billion dollars worth of digital assets, according to White. Keeping those funds safe is Coinbase\u2019s No. 1 priority, White said. Still, he acknowledged the spotty history of digital asset exchanges.<\/p>\n
\u201cThis is an industry that has a less-than-stellar past when it comes to meeting customer requirements,\u201d he said. The general movement is in the right direction, however, he said.<\/p>\n
DV Chain, a sister company to DV Trading in Chicago, handles most of its cryptocurrency trading volume off-exchange, said CEO Garrett See.\u00a0While DV does transact on a number of platforms, lack of liquidity and the quality of the technology can be a problem on exchanges, he said.<\/p>\n
\u201cSome of these exchanges take seconds or sometimes minutes between when you click to buy and when your order makes it to the exchange, if it makes it at all,\u201d See said. Because there are so many exchanges, \u201cliquidity is distributed across lots of different places,\u201d he added. If the market got to a point where there was a centralized exchange and all the volume is there, \u201cthen I don\u2019t think you\u2019re going to see flash crashes like that as much,\u201d See said.<\/p>\n
See and Cumberland\u2019s Cho are\u00a0exactly the type of market makers that digital exchanges need, yet the adage of \u201cliquidity builds liquidity\u201d is a tough problem to solve. \u201cMarket makers play that role, of bringing agility and efficiency to the marketplace,\u201d said Javier Paz, a senior analyst at Aite Group LLC. \u201cThe role of a liquidity maker requires at the very least close rapport with cryptocurrency exchanges,\u201d Paz said.<\/p>\n
There are signs that the worlds of cryptocurrency and traditional finance are coming together. Last week Gemini announced it struck a deal with CBOE Holdings Inc. to help the Chicago-based exchange create a futures contract based on bitcoin. The U.S. Securities and Exchange Commission last month issued its first guidance on digital assets and the exchanges where they trade, saying most coins are likely to meet the definition of a security and the markets where they trade need to register with the regulator.<\/p>\n
And the U.S. Commodity Futures Trading Commission in July granted final approval for LedgerX LLC to offer options contracts on bitcoin. The LedgerX and CBOE approach includes a clearinghouse standing in the middle of all trades, which will give those efforts more legitimacy in many traders\u2019 eyes, said Dan Hodd, co-founder of Digital Asset Investment Co., a hedge fund focused on trading digital assets.<\/p>\n
\u201cOne of the biggest challenges in this whole space is translating the capability of this new technology and the assets that come with it to the traditional financial system,\u201d said Hodd, who previously traded equity swaps at Citigroup Inc. \u201cIt has to fit both sides of the puzzle.\u201d<\/p>\n
The industry is progressing in terms of the volume of transactions on exchanges and the ease of trading, Tyler Winklevoss, who\u00a0founded Gemini with his brother Cameron, said in an interview. \u201cIt\u2019s a huge step\u201d to be developing futures contracts based on bitcoin that will trade at CBOE, he said. \u201cYou can\u2019t expect a child who\u2019s learning to walk to sprint, there has to be a sequence to it.\u201d Gemini is regulated as a New York state chartered limited liability trust company.<\/p>\n
The number of bitcoin trades on Gemini and GDAX jumped earlier this year. While in February, Gemini\u2019s volume hit just over 85,000, the next month it was more than 160,000, according to data from TradeBlock. GDAX transactions went from just over 171,000 to nearly 350,000 in the same span, according to TradeBlock.<\/p>\n
\u201cOver time all the technology becomes more fluid, better and easier to use,\u201d Cameron Winklevoss said in an interview. \u201cWhen we first got into bitcoin, we had to go to Mt. Gox,\u201d Tyler said. The former head of Mt. Gox, the bankrupt Japan-based bitcoin exchange that imploded in 2014 after losing hundreds of millions of dollars\u2019 worth of the cryptocurrency, began his trial last month. Chief Executive Officer Mark Karpeles pleaded not guilty in Tokyo to charges of embezzlement and inflating corporate financial accounts.<\/p>\n
The growing pains at the exchanges should be expected at this stage of the industry\u2019s development, said Mas Nakachi, an adviser to fintech companies who\u2019s spent nearly 15 years on Wall Street as an analyst and former CEO of OpenGamma, a software provider that specializes in derivatives. When Nakachi was trying to learn the Solidity coding language that is used to create the ethereum blockchain, he could only find one book on it on Amazon.com.<\/p>\n
\u201cWhen was the last time there was only one book on Java? The early \u201990s?\u201d he said in an interview. \u201cThe biggest misconception coming from the institutional side is the definition of an exchange,\u201d Nakachi said. Traditional markets segregate customer accounts and use clearinghouses to guarantee trades, among other security and operational measures, Nakachi said. \u201cWhen people refer to exchanges in the crypto space, there is none of that.\u201d<\/p>\n
He\u2019d like to see more steps like the ones taken by LedgerX and CBOE, which will use clearinghouses and other familiar market operations. Clearinghouses collect cash and securities like U.S. Treasuries to ensure if a trader fails there\u2019s enough money to cover losses. They also monitor risk on a daily basis and liquidate positions if traders can\u2019t meet their margin call.<\/p>\n
\u201cIt\u2019s so early it should be expected\u201d that there are things that still need to be done, he said, \u201cbut that\u2019s what the institutional guys are finding as they tiptoe into the space.\u201d<\/p>\n
Bitcoin needs \u201cDowntown\u201d Josh Brown more than he needs bitcoin.<\/p>\n","protected":false},"author":341034,"featured_media":219068,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sma_x_autopost_status":"idle","_sma_x_autopost_error":"","_sma_x_post_id":"","_sma_x_attempts":0,"footnotes":""},"categories":[44696],"tags":[187,8539],"class_list":["post-224202","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cryptocurrency","tag-bitcoin","tag-jp-morgan"],"_links":{"self":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/224202"}],"collection":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/users\/341034"}],"replies":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/comments?post=224202"}],"version-history":[{"count":1,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/224202\/revisions"}],"predecessor-version":[{"id":224204,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/224202\/revisions\/224204"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/media\/219068"}],"wp:attachment":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/media?parent=224202"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/categories?post=224202"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/tags?post=224202"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}