Wall Street, Regulators and Bitcoin

Wall Street, Regulators and Bitcoin

Bitcoin may be the fraud of the century, depending on whom you believe, or it could be a gold mine for early adopters.

Adventurous investors have already bought into the virtual currency and Wall Street is laying the groundwork for more wealth to flow into the cryptocurrency.

But nobody can say how big (or small) the bitcoin story will ultimately become.

Bitcoin still cannot be used to buy even a loaf of bread. It cannot be purchased from a company or sold directly on a major financial exchange and it is backed by no central bank. And it also dissimilar to metals like gold or silver, with universally accepted value.

Yet bitcoin is exchanged like money.

Near the end of 2017, bitcoin reached almost $20,000 in value amid a buying frenzy. It has since come down closer to earth and is now worth around $6,400.

Such volatility is too nerve-wracking for most mainstream investors but the radical price swings hold appeal for short-term traders.

True believers in the currency, along with these short-term speculators, now have a variety of investment opportunities at various risk levels.

– Debut on major exchange –

The most direct way to buy bitcoin is on an exchange that specializes in cryptocurrencies, although many of those platforms are at risk of hacking.

In late 2017, the Chicago Board Options Exchange became the first major exchange to offer a bitcoin product, a move that gave a legitimacy to the currency.

The Chicago exchange allowed trading on bitcoin futures — not on bitcoin itself — a financial instrument well known among investment professionals.

Another option is to pick an investment vehicle composed of bitcoin, such as the Bitcoin Investment Trust, which is managed by Grayscale Investments. But those interested in such ventures must transact in a private and bilateral basis and typically pay high fees.

Bitcoin believers are still awaiting the green light from regulators for exchange traded funds(ETF) that would track the movements of the virtual currency, a key step that could take the market more mainstream.

“The arrival of a potential bitcoin ETF remains top-of-mind for institutional investors seeking exposure to this emerging asset class,” said Michael Graham, an analyst specializing in Internet, blockchain and digital assets at Canaccord Genuity.

Yet many pension funds and other mainstream investors are likely to think twice before putting big funds into ventures that could soar — but could also sink.

The US Securities and Exchange Commission has rejected several proposed ETFs, including twice blocking ETFs proposed by the twin Internet entrepreneurs Cameron and Tyler Winklevoss.

Each time, the SEC expressed concerns about fraud and manipulation, in part because it is still exchanged primarily on unregulated exchanges.

– Broadening acceptance? –

Most of the biggest names in finance are at least studying ways to participate in bitcoin, although the steps so far have been incremental.

Jamie Dimon, chief executive of JPMorgan Chase, the biggest US bank by assets, famously called bitcoin a “fraud” in 2017 and has continued to speak skeptically of it.

Since May, Goldman Sachs has served as a clearinghouse for trading bitcoin futures for clients but has not offered bitcoin investments yet.

But Fidelity Investments, the giant money manager, this month unveiled a new venture, Fidelity Digital Assets, that will execute trades in digital currency for clients and permit them to store bitcoin or other digital assets with Fidelity.

And ICE, the parent company of the New York Stock Exchange, plans to launch its own bitcoin futures contract in November.

Bitcoin platforms continue to have a variety of problems, including lack of transparency, conflicts of interest and weak system safeguards, Christopher Giancarlo, chairman of the US Commodity Futures Trading Commission, said in a mid-October interview on Fox Business.

“Like all things, it takes time to mature, and with the movement of more institutional investors into the space, I think we’ll see that maturation,” Giancarlo said.

Bitcoin has carved out a name for itself as the world’s most popular cryptocurrency since arriving on the scene ten years ago.

However, the workings of the premier digital cash system remain something of a mystery to the general public.

– What is bitcoin? –

Bitcoin is a decentralised virtual currency created from computer code in the wake of the 2008 global financial crisis.

Unlike a traditional currency such as the dollar, euro or yen, bitcoin has no central bank and is not backed by any government.

Instead, the unit is controlled and regulated by its community of users, who argue that this makes it more efficient than traditional currencies.

There are some 17.3 million bitcoins in circulation, while the total number can never exceed 21 million.

– How does it work? –

Bitcoin uses so-called peer-to-peer blockchain technology to create and trade instantly, across the globe.

A blockchain is an extremely secure ledger for recording transactions that is open to all who use it.

Transactions happen when heavily encrypted codes are passed across a computer network.

The network as a whole monitors and verifies the transaction in a process that is intended to ensure no single bitcoin can be spent in more than one place simultaneously.

And, just like conventional currencies, bitcoins can be exchanged for goods and services — provided the other party is willing to accept them.

– How to buy bitcoin? –

Like other virtual units, bitcoin can be produced, or “mined”, by banks of computers solving complex algorithms.

However, large-scale currency mining can be very expensive because it requires cutting-edge technology and vast amounts of electricity.

Bitcoin can be purchased also with traditional currencies over online trading platforms.

Users hold the cryptocurrency in a protected virtual wallet, and can then “send” it to one another using the blockchain technology.

But serious security questions linger after hackers managed to steal bitcoin from some online “wallets” in countries including Japan and South Korea.

Bitcoin and its cryptocurrency peers are meanwhile known to be used by criminals for transactions and money-laundering, posing a headache for regulators.

– How much is one bitcoin worth? –

At its birth, bitcoin was priced at virtually zero, before experiencing astonishing growth in 2017 to peak at a record $19,500 by the end of that year.

However, investors feared a speculative bubble and it has since crashed to stand at about $6,400 per unit following months of less volatile trading.

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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