This New Tactic Might Finally Lure Big Investors to Bitcoin
Bitcoin believers argue the famous crypto-currency would be more stable—and more valuable—if only hedge funds and other institutional investors would get with the program and buy some. But so far, many big fish have stayed away—in part because bitcoin doesn’t provide the financial products and regulatory compliance they require.
This could start to change, however, as more companies shape their services for traditional investors that want exposure to bitcoin and other digital currencies. The latest examples comes from San Francisco-based Coinbase, whose GDAX exchange—a trading platform backed by the New York Stock Exchange, venture capitalists like Andreesen Horowitz and others—announced on Monday the launch of margin trading.
The new feature, which lets investors leverage their bets on bitcoin by a factor of three, is significant because the ability to trade on margin is widely used when trading traditional assets, and it is something institutional investors expect, according to Coinbase vice president Adam White.
A few other U.S. digital currency exchanges, including Kraken, offer margin trading. But White, in an interview with Fortune, says Coinbase’s GDAX (for Global Digital Asset Exchange) is different because it has the state licenses that asset managers want to see before they lay down clients’ money.
GDAX expects its combination of margin trading and regulatory compliance will attract hedge funds, high net worth individuals, and market makers like Cantor Fitzgerald. Down the road, White thinks digital currency will also attract investment bank “whales,” and that the likes of Goldman Sachs and J.P. Morgan will set up dedicated trading desks for bitcoin like the ones they have for oil, gold, and other types of foreign exchange.
“It will be hard to get the first big one. It’s a matter of waiting for the first mover, then the fast followers will come,” White says.
Here’s a GIF showing the trading platform in action:
Bring on the short sellers?
White also says GDAX’s new margin offering is significant because it provides an easy way to short bitcoin, meaning funds will have a way to hedge their positions. (The ability to short sell arises because GDAX supplies the margin purchase in bitcoin, which the investor can immediately sell for dollars and then later repay at a profit if the price drops).
It’s unclear, though, if this will be enough to draw in a new class of traditional investors at a time when bitcoin virtual currencies are still considered by many as exotic assets with a reputation for volatility and scams. The SEC this month dealt a blow to the digital currency industry when it flatly refused to approve a new ETF, which would have let investors buy and sell bitcoin like ordinary shares.
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White, though, downplays the impact decision and points to a surge in trading volumes since the ruling came out on March 13. He says the average worldwide trading volume has jumped 33% across the world, and that GDAX’s daily average has jumped 67%.
“I believe the SEC’s decision will increase demand for GDAX and our margin trading feature precisely because the SEC has highlighted the risk of offshore, risky exchanges. GDAX has established itself as a trusted, U.S. based exchange that operates within regulatory requirements and that is why our average daily trading volume has grown 2x relative to the rest of the industry,” White says.
Despite his optimism, bitcoin also faces a series of fresh headwinds that include a major IRS investigation, tighter regulation in China, and a squabble among bitcoin developers that could create two versions of the currency. Meanwhile, the latest controversies over bitcoin have proved a boon to competing virtual currencies like Ethereum and Dash, whose share of the digital currency market cap has jumped in recent weeks.
The bottom line is bitcoin and other virtual currencies are unlikely to lose their reputation anytime soon as an exciting but unpredictable investment.