Sure, your mother may have no idea what a Bitcoin is, and some investors who lost money trading it most likely wish that they had never heard of it, but one thing is certain: 2014 was the year of the Bitcoin, and the buyside is paying attention.
Theres no denying that Bitcoin had quite a year. There were allegations of a Ponzi scheme, new hedge funds and dark pools dedicated to the currency cropped up, and now the ultimate mark that the crypto-currency that started as the tender of drug traffickers and mercenaries has arrived − regulatory oversight.
And hedge funds and brokers are taking the $7.8 billion Bitcoin industry very seriously. “Digital currencies like Bitcoin are not going away,” said Barry Silbert, founder and CEO of SecondMarket, a capital-raising platform for private companies and investment funds. SecondMarket is creating what it hopes will become the largest, best-capitalized and best-run Bitcoin exchange in the U.S., and is enlisting banks and Bitcoin-related firms to be exchange members. “And Wall Street and the regulators know this; they’ve studied how to deal with it, and now they are starting to understand its potential,” Silbert said.
As Bitcoin slowly and steadily gains a foothold with more forward-thinking investors and consumers, financial services firms are looking to make a killing, either in investing in the 12 million Bitcoins currently in circulation or servicing its investors. “We’re betting that the market is going to be there, maybe not next month, but soon,” said Alec Petro, managing partner at Bay Hill Capital Management in Duxbury, Mass. “Institutional players are going to want to be in this space.”
Not to be outdone, SecondMarket has launched the Bitcoin Investment Trust, a $70 million open-ended trust that invests exclusively in Bitcoins, as well as a dedicated desk of 10 traders who buy and sell Bitcoins for the trust and other institutional clients.
Earlier this year, Atlas ATS opened a dark pool dedicated to trading Bitcoin currencies among institutional investors and established Bitcoin exchanges in Canada and Europe, with plans for more in Africa. It also offered a white label trading platform that will allow firms to offer their customers an exchange platform to trade and store Bitcoins. Were leading the charge on this from a technology point of view, said Shawn Sloves, co-founder and CEO of Atlas ATS. Sloves is not some shady anarchist with agoatee and a Guy Fawkes mask; he previously developed trading products and networks at Mantara and SunGard, and is co-founder and CEO of Fundamental Interactions, a virtual trading platform firm.
This year, TeraExchange joined forces with BitGo to provide secure custodial services for USD/Bitcoin swaps executed on its swap execution facility. TeraExchange is registered with the Commodity Futures Trading Commission, and it aims to provide access to Bitcoin swaps, interest rate swaps, credit default swaps and non-deliverable forwards.
All is not rosy in Bitcoin world, however. This summer, a judge fined a Texas man $40.6 million, blocked him from trading the virtual currency and further ruled his case as securities fraud that can be pursued by federal regulators. This was the first case to declare that the SEC has the authority to regulate Bitcoin transactions, and therefore opened the door to greater regulatory oversight. Bitcoin may not be attached to any sovereign nation, but it is subject to laws in the nations where it is traded.