Cryptocurrencies Move A Step Closer To The Mainstream

Yet LedgerX has competition. I attended a panel at the FIA Expo in Chicago on Oct. 19 that featured speakers from five companies -- including LedgerX -- offering different solutions. Coinbase is a well-known retail-friendly way to hold and trade cryptocurrencies. DRW has been assembling institutional-sized blocks of bitcoin for some time. 4  BitGo offers an institutional-quality wallet that allows companies to transact in bitcoin as if it were a physical currency, without having to take custody and worry about hacking, lost keys or other headaches. The Cboe Options Exchange has plans to offer futures and options based on a bitcoin index, bypassing the need to trade bitcoin.

If acquiring and holding cryptocurrencies becomes easier for institutions we can expect to see more passive investment, which in turn could lead to higher and more stable prices. But LedgerX has the potential to do far more. It could attract traders hoping to profit on the volatility of cryptocurrencies, offering liquid markets, secure clearing, a menu of options and -- most important -- physical settlement. That could bring cryptocurrencies squarely into the conventional financial system.

This is good news for anyone wishing to own or trade cryptocurrencies, but may be bad news for bitcoin true believers because institutionalization threatens the decentralization, anonymity and inflation-protection that were the reasons for inventing the virtual money. It could be equally bad news for those who think cryptocurrencies are Ponzi schemes.

A bellwether for the potential mainstreaming of cryptocurrencies is the open-end unit investment trust GBTC. It trades like a stock, but holds only bitcoin. Throughout 2017 it has traded at a 60 percent to 120 percent premium to the bitcoin it owns. This presumably represents the additional value of having a regulated financial product with standard clearing and settlement terms. The premium was 100 percent at the end of September, but it has eroded over the last three weeks down to 25 percent. If LedgerX, or anyone, is able to make cryptocurrencies standard institutional holdings, the GBTC premium should shrink to zero. Therefore, the sharp decline in the GBTC premium suggests the market is betting cryptocurrencies are moving into conventional financial channels.

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