Wall Street’s interest in bitcoin is growing quickly, aided by a raft of new tools and instruments designed to make trading of the digital currency easier and more familiar to investment professionals. A year ago, most traders and institutional money managers were highly skeptical about digital currency, if they knew about it at all, and viewed it almost exclusively through the prism of bitcoin’s well-publicized failures like Mt. Gox and Silk Road.
That was then. Fast forward twelve months, and despite bitcoin’s falling price and the continued regulatory debate, most buy-side denizens are not only informed about the basics of Bitcoin, but they’re increasingly interested in learning how it can complement their existing portfolio strategy as an uncorrelated, high-alpha asset class.
Several factors are responsible for driving this transformation. First, rapidly growing commercial and institutional appetite for bitcoin exposure has highlighted the need for financial products and services able to handle large positions, hedge risks and take advantage of bitcoin’s ample price volatility. Secondly, the Bitcoin ecosystem has become a venture-capital darling, with at least $295 million raised by startups since the start of the year (a record $96.5 million in October alone) and some $105 million raised in 2013.
Some of the biggest names in next-big-thing VC investing, like Andreessen Horowitz and Tim Draper, are placing big bets on digital currency. This influx of capital has enabled a large number of companies to develop software and platforms that replicate the trading experience familiar to most on Wall Street. Indeed, a number of applications are now available to track, chart, and analyze bitcoin as a financial instrument, not just as a unit of account. In turn, this has brought bitcoin out of the shadows and put it onto the trading desk in much the same manner as equity, fixed-income, commodity and derivative instruments. Even Bloomberg LP and Thomson Reuters have taken notice, and now include bitcoin pricing data & charts on their institutional trading platforms.
Furthermore, bitcoin’s relatively low liquidity and high volatility have highlighted the need for more sophisticated hedging and trading tools. Robust margin capabilities, high-frequency trading algorithms, and derivative contracts have all been developed in the past year designed to both protect investors as well as provide ways to speculate on swings in bitcoin’s price. And perhaps most interesting to long-term observers of the digital currency ecosystem, these tools are increasingly being developed by Wall Street trading veterans interested in exploring bitcoin, as opposed to bitcoin technologists trying to build trading applications. The difference is subtle, but significant.