Bitcoin

Institutions Are Coming! But What Does It Mean?

Institutional money coming to crypto has become almost a kind of prayer, touted by Twitter influencers and news outlets alike.

Make no mistake – all the signs point to a major influx of institutional investment in the crypto space, with CBOE applying for ETF approval and Goldman Sachs greenlighting Bitcoin futures. It’s happening – the real question is not if, but when, and it’s far less straightforward to answer.

The market has once again taken an upturn over the last week after a recent bearish trend saw prices decline across all currencies. Before the slump, the announcement that Coinbase was launching a custodial service catered towards institutional investors directly preceded an average of 11% price bump on average across all crypto assets, indicating the pivotal role the ability for institutions to invest now plays in the market.

After another decline, the announcement that ETFs may be approved saw another bullish surge. In this article we’ll take a look at some of the major ways institutions will be able to enter the market and what that means for the more casual retail investors.

Coinbase

Coinbase’s custodial service could be a pretty big deal, and it’s already live offering cold storage, an institutional-grade broker-dealer and reporting services, and a client coverage program. Coinbase is also in the process of onboarding hedge funds.

Why Institutional Money is Coming and What This Means for Bitcoin

Beyond that, the exchange announced earlier this month that it has the green light to go ahead with three key acquisitions aimed at enabling the exchange to become a federally regulated platform through which investors can trade cryptocurrencies classified as securities. This is huge, as it could help save those currencies from total damnation by enabling them to exist and be traded legally under SEC jurisdiction.

The Financial Industry Regulatory Authority approved Coinbase’s purchase of Keystone Capital Corp., Venovate Marketplace Inc. and Digital Wealth LLC in July 2018. Cryptos classed as security tokens may now soon be offered through the exchange and help place the exchange under more direct federal oversight which may further attract institutions.

Coinbase can now operate as a broker dealer, an alternative trading system and a registered investment adviser, greatly expanding the current business model.

“Being approved to take ownership of these licensed entities is one more step toward our ultimate goal of allowing our customers to trade securities tokens on our platform,” said a Coinbase spokesperson. “There are many more steps and conversations needed with regulators before this journey’s complete.”

Coinbase rival Circle Internet Financial Ltd., said last month that it will apply for registration as a brokerage and trading venue with the SEC so it can help investors buy and sell tokens deemed to be securities as well. The firm also plans to seek a federal banking license to provide more services to customers.

BlackRock Explores Crypto

Bitcoin prices climbed 5% after asset management giant BlackRock announced that it was setting up an assessment group to investigate cryptocurrencies and blockchain technology. This news is somewhat at odds with previous statements made by the company, such as when CEO Larry Fink stated that Bitcoin was an index of money laundering.

The news follows a report by Fortune magazine that hedge-fund billionaire Steve Cohen’s VC firm Cohen Private Ventures invested in Autonomous Partners, a cryptocurrency-focused investment fund.

Mati Greenspan, senior market analyst at eToro, said ““It definitely is causing some excitement. The idea of big financial firms moving into crypto certainly isn’t new, and this is a trend we’ve been noticing gaining strength since November.”

Japan’s SBI Launches Crypto Exchange

Japanese financial giant SBI Holdings announced that it now has a live in-house crypto exchange despite months of delays following security issues.

VCTRADE is the name of the exchange which is is currently only open for users who have pre-registered with the platform in October 2017, the company announced – it is expected to be available for a wider public in July of this year.

SBI will focus on trading XRP through VCTRADE at first and then add support for Bitcoin and Bitcoin Cash at a later stage.

SBI Holdings currently deals in remittance technology which may explain the focus on Ripple at the moment. The firm’s first wholly-oowned subsidiary  – SBI Virtual Currencies -was started in 2016 and was the country’s first crypto exchange that is fully backed by a major financial institution.

The platform later completed business registration with Japan’s Financial Services Agency (FSA) in September 2017 but announced in February of this year that the opening would be delayed due to security concerns amid the Coincheck hack.

 Goldman Sachs

Though at first GS was reluctant to enter the crpyto space, customer demand turned the tide and turned the banking giant towards crypto.  The investment bank is now looking to expand its recently established Bitcoin futures trading desk into services for direct cryptocurrency trades.

On June 20, Goldman Sachs COO David Solomon told Bloomberg:

“We are clearing some futures around Bitcoin, talking about doing some other activities there, but it’s going very cautiously. We’re listening to our clients and trying to help our clients as they’re exploring those things too.”

Solomon also told Bloomberg that the firm must “evolve its business and adapt to the environment.”

Andreessen Horowitz

Major Silicon Valley investor Andreessen Horowitz has launched a new $300 million fund focused on cryptocurrencies.

The fund will be caled a16z and will feature former federal prosecutor and Assistant U.S. Attorney Kathryn Haun as one of its co-leads. Haun has also been named as the firm’s latest general partner.

Andreessen Horowitz is a well-known crypto investor and provided early capital funding for Coinbase in the early days.

General partner Chris Dixon indicated in the post that the crypto-fund would take a decidedly long-term tack in its investments.

“We’ve been investing in crypto assets for 5+ years,” he wrote. “We’ve never sold any of those investments, and don’t plan to any time soon. We structured the a16z crypto fund to be able to hold investments for 10+ years.”

“We plan to invest consistently over time, regardless of market conditions. If there is another ‘crypto winter,’ we’ll keep investing aggressively.”

Dixon went on to say that the firm would focus on assets with a real, non-speculative use case.

“We want services powered by crypto protocols to be used by hundreds of millions and eventually billions of people. Crypto tokens are the native asset class of digital networks, but their value is driven by the underlying, practical uses cases.”

When Will Things Change?

Here’s the thing – while this all sounds like such drastic change, the reality is that it may take years for institutional investment to make a difference. Things happen very quickly in the crypto space, but the world of traditional finance moves at a slower pace.

In the below interview, BlockTower CEO Ari Paul estimates that it will be around 5 years before major firms change the crypto landscape forever, stating that the majority of crypto investors are still retail investors who don’t necessarily know what they’re doing.

Paul also states that there are only around 15 major firms currently involved in cryptocurrency, and that the rest are only testing the waters. This, however, can be seen as a good thing – as the investing expert points out, major traders will make competition even fiercer for retail traders.

For casual crypto traders, now may be the best time ever to be involved in the space, before trained experts with unlimited resources really up the standards. For investors, on the other hand, the advice is the same as always – wait it out, and hope that the influx of institutional money will create a long-term sustainable bull run in the nascent crypto market.

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Interested in other cool crypto posts….check out Lightning Network: How far away is it?and Bitcoin ETF approval could be huge for crypto!.

Bitcoin ETF Approval Could Be Huge For Crypto

The crypto market may finally be about to witness a successful application for a Bitcoin Exchange Traded Fund (ETF).

The Winklevoss twins have been trying to file since 2014, but the SEC turned them down  – arguably due to their lack of experience and connections in the area.

However, the current applicant is a far more major play – the Chicago Board Options Exchange (CBOE).

The CBOE is one of the most important and influential financial institutions in the world, and has something that previous applicants don’t – insurance.

Major concerns within the SEC over the application have historically centered around catastrophe scenarios – what happens to investors if there’s a hack, or the private keys get lost? What happens in the case of fraud?

CoinCenter’s executive director Jerry Brito said:

“The Winklevoss ETF proposal was rejected because the SEC found that the significant markets for Bitcoin tend to be unregulated overseas markets that are potentially subject to price manipulation. But this creates a chicken and egg problem. How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren’t allowed to bring products to market that grow domestic demand for digital currencies like Bitcoin?”

The twins were turned down in 2017 along with SolidX who also filed for an ETF application. While the US aren’t the only country capable of providing one, at the time the other leading cryptocurrency markets like Japan and South Korea did not have practical regulatory frameworks and policies in place to govern the cryptocurrency market.

Things have changed however, with Japan now a leading nation in crypto regulation, even leading the G20 to introduce regulations for crypto exchanges and investors.

South Korean regulators are now also beginning to acknowledge cryptocurrency exchanges as licensed and regulated financial institutions, making the Asian market increasingly more important in the space.

In the US, the role of the SEC is to protect investors from potential fallout –  the CBOE’s insurance will protect investors from these worst-case scenarios, and along with the high status of the CBOE this may lead to a successful application.

What does a Bitcoin ETF do exactly?

An ETF is defined as a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

In this case, the Bitcoin ETF would track a benchmark index price for Bitcoin and allow investors with brokerage accounts who are unfamiliar with or distrustful of crypto exchanges to easily buy in with no risk of the typical risks associated with participating in the crypto space beyond volatility.

Bitcoin ETFs will make it far, far easier to buy Bitcoin in a space that is currently rather convoluted. Many investors are interested in cryptocurrencies but would never register an account with Coinbase or try to get their head around digital wallets with encrypted keys, etc.

Public market investors are, however, familiar with ETFs, and if successful the filing will make it as easy for them as logging into their fidelity account and hitting the buy button without needing to trust familiarize themselves with exchange-specific interfaces like Binance and Coinbase. Given the high number of exchange hacks and exit scams that have hit the market over the years, a great many investors will simply never consider trusting one with their funds – but now they won’t have to.

The official document filed by CBOE with the SEC stated that the CBOE will only invest in bitcoin on behalf of investors. This boils down to the Cboe facilitating over-the-counter (OTC) trades via accredited investors in the traditional finance market, while insuring funds in bitcoin acquired by investors.

The document read:

“According to the Registration Statement, the Trust will invest in bitcoin only. The activities of the Trust are limited to: issuing Baskets in exchange for the cash and/or bitcoin deposited with the Cash Custodian or Trust, respectively, as consideration; purchasing bitcoin from various exchanges and in OTC transactions; delivering cash and/or bitcoin in exchange for Baskets surrendered for redemption; maintaining insurance coverage for the bitcoin held by the Trust; and securing the bitcoin held by the Trust.”

CBOE Application: Asian markets and Insurance are pivotal

The SEC rejected previous applications specifically because the crypto sector is not regulated overseas, meaning it is impossible for them to influence regulatory compliance outside of their jurisdiction. Now that Japan and S. Korea are planning to fully regulate the crypto exchange markets the future is looking very bright for the timely EFT application.

The official CBOE Bitcoin ETF filing application document categorically states that insurance will be provided to investors.

“In addition to its security system, the Trust will maintain comprehensive insurance coverage underwritten by various insurance carriers. The purpose of the insurance is to protect investors against loss or theft of the Trust’s bitcoin. The insurance will cover loss of bitcoin by, among other things, theft, destruction, bitcoin in transit, computer fraud and other loss of the private keys that are necessary to access the bitcoin held by the Trust,” the Cboe filing read.

The document goes on to state the specific levels of insurance provided:

“The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage, with the ability to increase coverage depending on the value of the bitcoin held by the Trust. To the extent the value of the Trust’s bitcoin holdings exceeds the total $125,000,000 of insurance coverage, the Sponsor has made arrangements for additional insurance coverage with the goal of maintaining insurance coverage at a one-to-one ratio with the Trust’s bitcoin holdings valued in U.S. dollars such that for every dollar of bitcoin held by the Trust there is an equal amount of insurance coverage.”

These figures show what kind of difference we may be about to see in the size of investments and the level of investment that may be about to enter the market. A successful filing would be great for adoption, allowing a flood of institutional investors and allowing people to inject easily some Bitcoin in their 401k as a speculative asset.

When will we know?

The SEC typically has 45 days to make a decision on proposed regulatory changes, leaving them until August 16 to rule on the June 2 application.

The market could be on the brink of something major – so keep an eye out for news of the application!

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Interested in other cool crypto posts….check out What happens when the last Bitcoin is mined?and The Price of Bitcoin vs Cost of Mining.

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