ICE Creation of a new cryptocurrency market: a double-edged sword

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Intercontinental Exchange (NYSE: ICE), parent of the New York Stock Exchange, announced today that it is building Bakkt a new cryptocurrency ecosystem, along with several partners. This is an important step in mainstreaming bitcoin and cryptocurrency. But it's also a double-edged sword, because it's probably the beginning of Wall Street that creates financial claims for bitcoin from nothing (and not supported by actual bitcoins), which could compensate for part of the forced scarcity of Bitcoin algorithm. & nbsp Maybe that's why the price of bitcoin has slightly decreased after today's announcement of ICE.

& nbsp; [19659005] Positive

Bakkt is even more ev I'm guessing that the incumbent institutions are taking more and more "Join & # 39; em" approaches to cryptocurrencies, as explored in Part 1 of my 3-part series on the rivalry between cryptocurrencies and Wall Street. Bakkt could bring many positives to cryptocurrencies:

• will probably attract more institutional investors to cryptocurrencies,
• could solve the problem of custody that has so far prevented large institutions from investing in the class of cryptocurrency activities because of the absence a qualified custodian, who the SEC requires for investment advisors who manage $ 150 million or more,
• can help regulators become more comfortable with the industry to see the ICE involved, and
• more important – it will probably attract corporate issuers to raise capital using the Bakkt ecosystem. Cryptocurrencies offer issuers the perspective of capital free from alliances and without low-cost preferences. Investors have shown their will – rational, in my opinion – to negotiate standard investor protection in exchange for low friction costs related to cryptocurrencies: there are no underwriters, trustees, transfer agents, central offices, custodians, clearing houses or central deposits of securities involved in the cryptocurrency, issuance transactions and, above all, cryptocurrency settle instantly and without any counterparty risk. In addition, issuers only incur a small percentage of the costs of being a public company, such as the costs of investor relations, proxy solicitation costs and significant compliance costs related to the financial reporting and auditing of the public company. In addition, cryptocurrency issuers can repurchase the currencies or execute an offer / exchange offer much more efficiently than traditional securities.

I doubt it will take a long time for the major corporate broadcasters to join Telegram and Eastman Kodak in raising capital through these markets. This is the good type of financing, which attracts new investors to networks, each of which (in blockchains proof of work) makes networks safer by bringing new IT resources to networks, directly or indirectly on their behalf and, in turn, makes networks more decentralized, resilient and immune to attack.

Congratulations to ICE for being the first!

Negatives

But the news of the ICE also have negative aspects. As explored in Part 2 of the 3-part series only two days ago, Wall Street's only chance to control cryptocurrencies is to leverage them, creating more financial credits for the coins than they are. the underlying currencies and thereby influencing the prices of the underlying currencies through the derivatives markets. At this point it is practically impossible for anyone to gain control of the Bitcoin network (and probably also other large cryptocurrency networks), so the only main way to control Wall Street is to leverage them.

The financial system has perfected the art of financialization based on leverage, unfortunately, and the announcement of ICE on plans for the launch of a regulated and physical futures and stock contract subject to approval by the CFTC in November this means that leveraged financialization will probably come to bitcoin in style.

This is exactly what I had warned in Part 2 :

"While cryptocurrency markets are developing further, here's what I'll look for: financial institutions that begin to create claims against cryptocurrencies which are not fully supported by the underlying currencies (which could take the form of marginal loans, coins / re-imputation loans, fixed-term contracts for currencies s or ETFs & nbsp; 100% of the underlying currencies at any given time.) However, none of these is happening in the market.

"So far, regulators have only allowed bitcoin derivatives in cash-settled form between main derivatives counterparts. While cash-settled derivatives can affect the price of the underlying asset, the entity of the impact is less than the impact if the derivatives are settled on an underlying that is "difficult" to be borrowed "or" special "(using securities lending terms)). Bitcoin is particularly & nbsp; "difficult to borrow" & nbsp; therefore a requirement to deliver the underlying bitcoins into derivative contracts would amplify the bitcoin price fluctuations.

" In the end it is probable that the regulators will approve bitcoin-regulated derivatives among the main derivatives counterparts, at which point banks will try to borrow bitcoins below and at that time the custodial arrangements of institutional investors will start to become important. Will custodians make their coins available for borrowing in the "currency loan markets" as they do today with the loan of securities? Will they consider the cyber security risks of borrowed currencies (which involve the revealing of private keys) that are too high compared to the extra yield available for the loan of coins, and will institutional investors even lend money from their custodians? [19459019Regardlessofthiswhenbitcoin-depositedderivativesappearonthescenecryptocurrenciesareverylikelytheyare"difficulttoborrow"forawhilebecauseHODLers(long-termowners)ownmostofthecoinsandrarelyusethekeepers "(Emphasis added)

Why does this matter? Bitcoin has a scarcity imposed by algorithms, and this is an important part of what gives value.If Wall Street starts creating bitcoin claims from nowhere, without the support of real bitcoins, Wall Street will be able to compensate for this shortage up to a certain point

The same pattern took place in commodity markets, such as gold and silver. in credit derivatives, which up to 10x grew the size of the underlying corporate bond market before the 2008 financial crisis and had become the proverbial "tail that wagged the dog" driving the price of bonds Underlying Corporate Governance

If a large degree of leverage-based financing occurs in Bitcoin, the community that protects the Bitcoin network with its processing power may switch to a Unfortunately, news on this front is not fair, as traders have confirmed that the daily liquidity for synthetic versions of bitcoin is already around $ 15 billion, which is the daily spot liquidity of 3x bitcoins of about $ 5 billion. . Bitcoin leveraged leveraging finance has been mostly done outside the US – a good example of this is the exchange with Hong Kong of OKEx's confirmation today that one of its customers has suffered serious losses on a position of $ 400 million futures. has recovered $ 9 million from his clients to cover the loss of the exchange.

But there is reason to be optimistic, thanks to HODLers, because bitcoin is a stock asset that can only be financed if holders bring their coins into the financial system.

To summarize, the liquidity deriving from the good type of financing is a big positive for cryptocurrencies, but, to quote from Part 2 :

"… the liquidity deriving from the financialization leverage – which creates cryptocurrency claims out of thin air – is the opposite side of the double-edged sword: cryptocurrency speculators will encourage it because they can lead to short-term gains, but long-term HODLER will simply resist holding their coins far from the financial system. & Nbsp; As a result, it is likely that more than the good type of financing will occur in cryptocurrency markets compared to the bad type, which means that the alpha opportunities (excess yield) may be available for Institutional investors, it also means that Wall Street is unlikely to "capture" cryptocurrencies. "

Finally, the The cryptocurrency market today noted the irony of this quote from the CEO of ICE, Jeffrey Sprecher, in his press release :

"In bringing regulated and connected infrastructures together with institutional applications and consumption for digital resources, we aim to build trust in the asset class on a global scale, consistent with our track record of bringing transparency and trust to previously unregulated markets. "(emphasis added)

Bitcoin already has confidence and transparency because no centralized institution controls it.But a centralized institution that is authorized to create financial claims for bitcoin from nothing has the potential to erode some of that trust and transparency

Fortunately, for existing bitcoin investors, HODLers risk making it difficult to store most of the bitcoins outside the financial system and making it the epitome of "difficult to borrow."

Disclosure: I own cryptocurrencies and investments in blockchain companies, including Kraken, Overstock .com and Symbiont, and I worked at Wall Street from 1994-2016, recently managing the business of pension solutions by Morgan Stanley.

& nbsp;

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Intercontinental Exchange (NYSE: ICE), parent of the New York Stock Exchange, announced today that it is building Bakkt, a new ecosystem to encrypt tocurrencies, along with several partners. This is an important step in the mainstreaming of bitcoins and cryptocurrencies. But it's also a double-edged sword, because it's probably the beginning of Wall Street that creates financial claims for bitcoins from scratch (and not supported by actual bitcoins), which could offset part of the forced scarcity of Bitcoin algorithm. [19659037] Maybe that's why the bitcoin price has slightly decreased after ICE's announcement today.

Positives

Bakkt is even more proof that incumbent institutions are increasingly taking the "join & # 39; em" approach to cryptocurrencies, as explored in the first part of my 3-part series on the rivalry between cryptocurrencies and Wall Road. Bakkt could bring many positives to cryptocurrencies:

• will probably attract more institutional investors to cryptocurrencies,
• could solve the problem of custody that has so far prevented large institutions from investing in the class of cryptocurrency activities due to the absence a qualified custodian, who the SEC requires for investment advisors who manage $ 150 million or more,
• can help regulators become more comfortable with the industry to see the ICE involved, and
• more important – it will probably attract corporate issuers to raise capital using the Bakkt ecosystem. Cryptocurrencies offer issuers the perspective of capital free from alliances and without low-cost preferences. Investors have shown their will – rational, in my opinion – to negotiate standard investor protection in exchange for low friction costs related to cryptocurrencies: there are no underwriters, trustees, transfer agents, central offices, custodians, clearing houses or central deposits of securities involved in the cryptocurrency, issuance transactions and, above all, cryptocurrency settle instantly and without any counterparty risk. In addition, issuers only incur a small percentage of the costs of being a public company, such as the costs of investor relations, proxy solicitation costs and significant compliance costs related to the financial reporting and auditing of the public company. In addition, cryptocurrency issuers can repurchase the currencies or execute an offer / exchange offer much more efficiently than traditional securities.

I doubt it will take a long time for major corporate issuers to join Telegram and Eastman Kodak to raise capital through these markets. This is the good type of financing, which attracts new investors to networks, each of which (in blockchains proof of work) makes the networks safer by bringing new IT resources to the networks, directly or indirectly on their behalf, and in turn makes the more decentralized, resilient and immune networks to attack.

Congratulations to ICE for being the first!

Negatives

But the news of the ICE also have negative aspects. As explained in part 2 of the 3-part series only two days ago, Wall Street's only chance to control cryptocurrencies is to finance them by leveraging, creating more financial credits for the coins than the underlying currencies and thus influencing the prices of the underlying currencies via the derivatives markets. At this point it is practically impossible for anyone to gain control of the Bitcoin network (and probably also other large cryptocurrency networks), so the only main way to control Wall Street is to leverage them.

The financial system has perfected the art of financialization based on leverage, unfortunately, and the announcement of ICE on plans for the launch of a regulated and physical futures and stock contract subject to approval by the CFTC in November this means that leveraged financialization will probably come to bitcoin in style.

This is exactly what I had warned in Part 2:

"While the cryptocurrency markets are developing further, here's what I'll look for: financial institutions begin to create claims against cryptocurrencies that are not fully supported by underlying currencies (which could take the form of marginal loans, coins / re-imputation loans, futures contracts with monetary constraints or ETFs which do not track 100% of the underlying currencies at any given time). , none of these are happening in the market.

"So far, regulators have only allowed bitcoin derivatives in cash settled form among the main derivatives counterparts. While cash-settled derivatives can affect the price of the underlying asset, the entity of the impact is less than the impact if the derivatives are settled on an underlying that is "difficult" to be borrowed "or" special "(using securities lending terms). Bitcoin is particularly "difficult to borrow" so the obligation to deliver the underlying bitcoins into derivative contracts would amplify the bitcoin price fluctuations.

" If necessary, the regulators will approve bitcoin derivatives deposited with the main derivatives counterparts, at which point the banks will try to borrow the underlying bitcoin and At that time, the institutional investors' custody arrangements will start to become important: will custodians make their treasured currencies available to borrow in the "currency lending markets" as they do today by lending securities or will they consider the security risks? loan borrowing (which involves the revealing of private keys) that is too high compared to the extra yield available for the loan of coins, and will institutional investors even allow the loan of coins from their custodians? Regardless, when the bitcoin-deposited derivatives appear on the scene, it is very probable that the cryptocurrencies are "dif to be borrowed "for some time because HODLers (long-term holders) own most of the coins and rarely use the keepers. "(Emphasis added)

Why does this matter? Bitcoin has a scarcity imposed by algorithms, and this is an important part of what gives value.If Wall Street starts creating bitcoin claims from nowhere, without the support of real bitcoins, Wall Street will be able to compensate for this shortage up to a certain point

The same pattern took place in commodity markets, such as gold and silver. in credit derivatives, which had grown up to 10 times the size of the underlying corporate bond market before the financial crisis in 2008 and had become the proverbial "tail that wagged" driving the price of underlying corporate bonds 19659016] leverage-based financing never happens with bitcoins, the community that protects the Bitcoin network with its processing power can switch to a different currency. news on this front are not fair, as traders have confirmed that the daily liquidity for synthetic versions of bitcoin is already about $ 15 billion, which is the daily spot liquidity of 3x bitcoins of about $ 5 billion. Bitcoin leveraged leveraging finance has been mostly done outside the US – a good example of this is the Hong Kong-based exchange of OKEx's confirmation that one of its customers suffered heavy losses on a $ 400 million futures position. back $ 9 million from its customers to cover the loss of the exchange.

But there is reason to be optimistic, thanks to HODLers, because the bitcoin is a stock asset that can only be financed if the holders bring their coins into the financial system. [19659016] To sum up, the liquidity deriving from the good type of financing is a great positive for cryptocurrencies, but, to quote Part 2:

"… liquidity deriving from financialisation based on leverage – which creates cryptocurrency claims out of thin air – it's the opposite side of the double-edged sword, cryptocurrency speculators will encourage it because they can lead to short-term gains, but long-term HODLers will resist it simply by keeping their coins away from the financial system. As a result, it is likely that more than the good type of financing will occur in cryptocurrency markets compared to the bad type, which means that the alpha opportunities (excess returns) may be available to institutional investors. will hardly be able to "capture" cryptocurrencies. "

Finally, market operators and cryptocurrencies today have noted the irony of this quote from the CEO of ICE, Jeffrey Sprecher, in his press release:

"In the regulated and connected infrastructure, together with institutional and consumer applications for digital resources, we aim to strengthen trust in the business class on a global scale, consistent with our track record of which brings transparency and trust to previously unregulated markets. "(emphasis added)

Bitcoin already has confidence and transparency precisely because no centralized institution controls it.But a centralized institution that is authorized to create financial claims for bitcoin from nothing has the potential to erode some of that trust and transparency

Fortunately, for existing bitcoin investors, HODLers risk making it difficult to store most of the bitcoins outside the financial system and making it the epitome of "hard to borrow."

Disclosure: I own cryptocurrencies and investments in blockchain companies, including Kraken, Overstock.com and Symbiont, and I worked on Wall Street from 1994-2016, recently managing the Morgan Stanley pension solutions business.