An incisive opinion on why Bitcoin, with all the noise and talk of large scale acquisitions, is just a playground for those wanting a quick buck and will never be part of the genuine electronic financial markets economy
During the past few years, Bitcoin, the virtual currency with an extremely checkered history that is now heading toward a decade in existence, has been viewed by the establishment in two polarized ways.
Following its inception in 2009, when the digital currency made its way into the hands of individuals without the control of central banks and without being restricted to national borders by governments as is the case with established sovereign currencies, Bitcoin was regarded as being the equivalent of a Stalinist people’s rebellion against the organized central issuers.
Its pseudonym-orientated nature and lack of physical presence created a smokescreen that would make a summer’s day in Beijing look as clear as the Caribbean sea, its creator, Satoshi Nakamoto, being a non-entity, having disguised himself for several years before being outed as Australian computer programmer Craig Steven Wright, and its completely peer-to-peer nature in which individuals can ‘mine’ Bitcoins via a system which makes it more and more difficult to obtain the correct nodes on the Blockchain database that are required to form ‘coins’ all allude to a world of mavericks, scientists and anarchists rather than organized financial markets officials.
A series of high profile Bitcoin exchange collapses ensued, a milestone example having been Mark Karpeles’ MtGox, was originally the brainchild in late 2006 of programmer Jed McCaleb, who can also lay claim to having co-developed Donkey2000, Overnet1, Ripple, and Stellar, thought of building a website for users of the Magic: The Gathering Online service to let them trade cards like stocks.
This in itself demonstrates the completely polar opposite from which Bitcoin’s roots hail compared to the established electronic financial world.
In January 2007, Mr. McCaleb purchased the domain name mtgox.com, short for “Magic: The Gathering Online eXchange”. Initially in beta release,sometime during late 2007, the service went live for around 3 months before Mr McCaleb moved on to other projects, having decided it was not worth his time. He reused the domain name in 2009 to advertise his card game The Far Wilds.
Therein lies the very first seed that should have been sewn in the minds of any electronic markets executive that Bitcoin is simply a vehicle for young upstarts to make a loud noise about something that they themselves hail as the next big thing, before either ditching it and moving onto something completely unrelated, or gaining some ground, attracting the attention of Silicon Valley venture capital funds on the premise that it may amount later on to something ‘huge or epic’ (both words that would never be uttered during a board meeting at a serious, established company), before running for the hills at the age of 25 with their exit capital.
The demise of MtGox reached its pinnacle on February 24, 2014, when the venue suspended all trading, and hours later its website went offline, returning a blank page. An alleged leaked internal crisis management document claimed that the company was insolvent, after losing 744,408 bitcoins in a theft which went undetected for years.
Six other major bitcoin exchanges released a joint statement distancing themselves from Mt. Gox, shortly before Mt. Gox’s website went offline.
When has this ever happened at CME or ICE’s electronic listed derivaticves or online currency futures contracts venues? That’s right. Never.
In a January 6, 2015, Kraken CEO Jesse Powell discussed being appointed by the bankruptcy trustee to assist processing claims, and those who still believed in an unsecured, unbacked, peer to peer currency began to herald Kraken as a stable face among complete villainy.
This all occurred just after the seizure of Silk Road by the US government for using the dark web and virtual currency to facilitate money laundering and illicit trade, and quite simply the image in the mainstream, grey suit world of institutional financial technology could not have been worse.
Suddenly, the attention of the corporate giants turned to Blockchain, the intrinsic database technology that is inseparable from Bitcoin, became of interest to large institutions. This is when the upstarts began making a loud noise again. Bottom of the range technology forums went from being peppered with the word Bitcoin to being peppered with the word Blockchain. Absolute noise, the whole lot of it.
Whilst Bitcoin has become an overused word and has in many cases become a tiresome side issue which has no relevance, vast institutions including Goldman Sachs, Merrill Lynch, PriceWaterhouseCoopers and various venture capital groups have invested several hundred million dollars into the development of the blockchain technology which is inseparable from Bitcoin, thus the technology start-ups that initially set out to develop digital currency technology are now the darling of vast financial institutions and seasoned commercial investors due to their ability to adapt blockchain database technology to automate specific aspects of banking and create radically more efficient systems for financial markets infrastructure in future.
Until recently, we have seen start-ups with vast venture capital investments, an example being 21C, a Silicon Valley based Bitcoin start up that raised a record breaking $116 million two years ago. But where is its pedigree and what is its progress in the institutional trading world?…. Anyone hear any of Mountain View’s finest tumbleweed blowing across the bay?
The trouble has so far been the lack of credentials, and the lack of senior level expertise within the mainstream industry by the leaders of these start ups to be able to integrate that technology successfully and make it part of the accepted market infrastructure.
It is likely that those who noticed the launch of London-based start up Cobalt DL just a matter of months ago may have experienced the glazing over of their eyes as yet another oddly named blockchain developer was the subject of soundbites on mainstream television news stations.
Understandable, however those in the know will have noticed a few very important differences between this and the usual fly-by-nights that are a big wow today and gone tomorrow.
Cobalt DL (DL stands for Distributed Ledger), is not just any start up, and has massive credentials with its leadership being a pinnacle of FX trade clearing, post-trade processing and electronic execution expertise.
Andrew Coyne, who is CEO of Cobalt DL, will likely be remembered by those, including myself, who remember him very well as CEO of Traiana, the cross-asset post-trade processing and electronic clearing division of British interdealer broker ICAP, which was founded in Tel Aviv in 2007 by industry veteran Gil Mandelzis, along with Roy Saadon and James Chrystal before being bought by Traiana in 2007.
In May of 2012, Andrew Coyne was appointed chief executive officer, Mandelzis as executive chairman.
Mr. Coyne left the firm in February 2015 quietly, and embarked on the estblishment of Cobalt DL, whereas Mr. Mendelzis went on to become head of EBS BrokerTec Markets. Mr. Coyne was replaced then by Nick Solinger.
During Mr. Coyne’s leadership six major banks signed up to Traiana’s clearing network, known as Harmony CCP Connect, to manage the connectivity and workflow required to clear over-the-counter FX derivatives. The banks were Citigroup Inc., Bank of America Merrill Lynch, Deutsche Bank AG, JP Morgan Chase & Co., Morgan Stanley and UBS AG.
It does not get any more institutional than that.
The problem is that it is the blockchain distributed ledger technology that is of interest to the large institutions and management consultancies, and not the Bitcoin that it is unfortunately stuck with by default.
There is no way that the investors in longstanding bank technology would entertain bow-tie-wearing, sharp suited mavericks who spent their youth programming interactive computer games and now utter the word Bitcoin every two seconds on various technology forum in an attempt to create global interest, especially when it has been clear to see from the very beginning where they all end up.
Jaron Lukasiewicz, CEO of Coinsetter, exited and spent several months in California before joining Rhodes Corporation earlier this year. Coinsetter had been acquired by Kraken in January last year, just a short time after it had risen to become a promienent Bitcoin exchange in New York. Acquisitions and exits of mainstays and industry leaders do not occur that quickly in any sector of the electronic trading business.
Mauro Betschart of BTC Global, Jeff Tucker and other individuals that had donned a tuxedo and become digital warriors for the circumvention of the system have all gone completely quiet.
The pattern that should have been noticed, however, started right at the beginning when the quick exit mentality made itself known.
Kraken has been instrumental in standing itself out as a major entity in acquiring Bitcoin’s large names such as Coinsetter, and also becoming Trustee of MtGox’s bankruptcy however, it is apparent that Kraken is on yet another acquisition drive. FinanceFeeds is privy to information that infers that the company is to acquire another cryptocurrency entity this week, however the details are not yet in the public domain.
This can be written off as yet another loud PR noise for the Bitcoin sector, by an entity which is attempting to bulk itself up synthetically so that it, like all of its peers and their founders, can exit and never be seen again.
The information that has been provided is obscure and vague, and is full of superlatives, yet no figures. It emphasizes that Kraken already owns Coinsetter, CaVirtex (Canadian Virtual Exchange) and CleverCoin, as well as the wallet funding firm Glidera. So what? This is not a list of credentials that has any intrinsic value.
Instead, it is a series of firms that were founded by young Silicon Valley trendies with no experience, who convinced every equally trendy magazine staffed by Californian interns and hipsters that this is the next big thing, and that a lifetime supply of beard topiary paraphernalia could be funded if they utter the words that they don’t quite understand enough times until an equally trendy hipster from a Silicon Valley fund says “hey man, let’s buy that dude out, he is far out.”
No facts and figures, no financial metrics and no method of measuring nominal trade volume is possible, and the value of the actual assets is not measurable at all. Add this to the five-minutes-and-on-to-the-next-thing mentality of the limelight-hungry founders of these brands, which is all they are, and there is no future for the institutional electronic trading world’s inclusion of Bitcoin in its remit.
Kraken makes some statements that bolster its size in the run up to the forthcoming supposed acquisition of an entity that has no publicly reported value, those being:
– Bitcoin price has increased over 300% in the past year, now trading above a $10B market cap.
– Since launching, the use of bitcoins is growing exponentially, while the supply of new bitcoins is exponentially decreasing – dropping by half every four years with the total supply capped at 21M.
– Total VC investment in bitcoin companies to date is over $1B.
– VC investment in blockchain accounted for half of all Fintech investment in 2015 and Q1’16 saw a 385% jump over the previous quarter.
– 16,178,538 bitcoins have been mined to date.
Yes. And I’m a hobgoblin.
It is equally easy to ask a PR consultant to write that there is an exchange that trades golden elephants, and that venture capital partners see that as unique and worth billions in investment. There is no fundamental method of backing this up, thus it is noise.
A quick search of the transactional data on LSE, CME, ICE and Cantor will show every transaction that has taken place. All mergers and acquisitions that have taken place during recent times involving listed venues are subject to government oversight, regulatory approval and have legal documents listed publicly showing their actual values.
Compare this to the way that the reliable firms are structured and how their mergers take place.
In July 2015, there was an acquisition by Deutsche Boerse of FX trading platform 360T for $796 million.
Now Deutsche Boerse is embroiled in its fraught merger with the London Stock Exchange, which has been deemed monopolistic by the European Commission, however that was due to proceed due to the imminent sale of LCH SA, the European division of LSE’s clearing division LCH.Clearnet as a condition of the transaction, whose buyers will be its largest customer, but now it looks like the powers that be have blocked the merger once and for all.
Hotspot FX, one of the world’s most renowned OTC FX ECNs was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September this year, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes was reduced across all currency pairs to further improve hedging opportunities.
FinanceFeeds is also aware that this has been a focus for Deutsche Boerse for some time. Back in 2011, Deutsche Boerse took a minority stake in British FX technology solutions provider Digital Vega which was a technology vendor to buyside and sellside firms in the OTC derivatives sector.
At that time, the idea was to increase Deutsche Boerse’s positioning in the provision of pre-trade price transparency in the derivatives area for institutional investors and taking an initial footprint in the FX derivatives space. An investment agreement was signed in December, whereby Deutsche Börse will pay a US dollar amount in the single digit million range.
EUREX bought the 360T treasury system, with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view. Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics.
Completely different, and not one of these was the subject of conversation among idlers in coffee shops but were the boardroom directives of large commercial giants with decades of experience.
Hence, it is wise to concentrate on the institutional business that we know, love and trust, and not to line the pockets of inexperienced upstarts whose ideology is a triumph of PR over susbtance.
#bitcoin, #deutsche boerse, #exchange, #financial markets, #silicon valley, #venture capital