Credit for Cryptos: Leverage Trading Is Coming to Bitcoin
“Leverage is the touchstone of most of the bubbles te the world.”
A few years ago, that comment by Murray Stahl, chairman and CEO of asset manager Horizon Kinetics, would have bot so typical for a cryptocurrency conference spil to escape notice. But at CoinDesk’s Overeenstemming: Invest event on Tuesday ter Fresh York, Stahl’s credit-wary sentiment stood out spil an outlier.
Instead, “leverage,” “lending,” “margin trading” and “credit” were painted spil elements of the market that need to be further developed (along with better custody services) ter order for the nascent crypto asset industry to flourish – not sins of the legacy financial system to avoid repeating.
Call it a sign of selling out, an early warning of systemic risk or simply an indicator that the cryptocurrency world is maturing. Either way, the arrival of institutional and high-net-worth investors te the space has created openings for services similar to the prime brokerage that financial institutions have long provided to hedge funds, several speakers said.
“There is a strong request for leverage te the space,” said Adam White, a vice voorzitter at Coinbase and general manager of GDAX, its digital asset trading toneelpodium.
To meet that request, GDAX hopes to reintroduce a margin service that it waterput on “pause” earlier this year, White said during a morning panel discussion. (He didn’t say why the service wasgoed suspended, but it evidently happened sometime after the ether ” flash crash ” this summer.)
But the desire of traders to amplify comes back with leverage is not the only reason some see a need for more lending te this market.
Rather, some provision of credit on an intraday poot and post-trade settlement is inescapable even when assets are lodged on a blockchain, said Max Boonen, CEO of B2C2, an electronic market making rigid based ter London.
During his morning presentation, Boonen challenged one of the long-touted selling points of blockchains: the instant settlement of trades.
He told the 1,300-strong crowd:
“Could settlement become swifter? Yes. Could settlement become instant? Absolutely not, and strafgevangenis should it be.”
For one thing, the block size debate ter bitcoin has underscored that there is a “trade-off inbetween the speed of settlement and the resilience of the payments infrastructure,” he said. “The more transactions you shove through the network, the more brittle it can become.”
Moreover, gross settlement – a pre-blockchain term for trades that are lodged spil soon spil they are processed – “imposes a lotsbestemming of pressure on the balance sheets of market participants,” said Boonen.
For example, he told the audience, “if I buy $1 million of Treasuries ter the morning, and I sell my Treasuries te the afternoon, I need to maintain at all times that $1 million on my balance sheet.”
On the other arm, netwerken settlement (the type of system that real-time gross settlement and straks blockchains were supposed to substitute) permits for a more efficient use of balance sheets – but requires intraday credit, he said.
Credit creeps te
Echoing thesis speakers, Dan Matuszewski, the head of trading at Circle Internet Financial, said during a morning panel that there is a “real strong need” for the capability to borrow ter this market.
It would not only facilitate brief positions but also provide working capital for trading desks to make markets, he said.
During his talk, Boonen of B2C2 acknowledged the irony of the situation given that bitcoin wasgoed born spil a reaction to the 2008 credit laagconjunctuur.
“Bitcoin enthusiasts truly, indeed do not like credit,” he said. But, he added, “for better or for worse, credit is an significant part of a functioning and liquid financial market.”
Even before the institutional money began flowing ter, he noted, “by necessity, credit did creep back into bitcoin and crypto markets ter general,” with the major exchanges suggesting leverage to the early retail investors.
The “beauty” of cryptocurrency is that trusted third parties are not required to simply transfer funds inbetween wallets, Boonen said. But for now, he added, they are needed for the more complicated business of trading crypto assets, “to a much greater extent than te the mainstream financial markets.”
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake te Coinbase
Photo via Michael del Castillo.
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