Wall Street firms are making bitcoin more stable

HBO

• 2018 has witnessed a drop-off in price variations on
  digital asset exchanges.
• That trend is tied to the entrance of large Wall Street
  firms into the market, which makes it more stable, according to
  cryptocurrency data provider SFOX. 

Many crypto enthusiast long for a day when bitcoin will replace
the entire financial system. But in the meantime, Wall Street
might actually be helping the digital asset’s long term adoption,
one firm says. 

New data from SFOX, the cryptocurrency data provider, shows that
2018 has witnessed a drop-off in price variations on digital
asset exchanges. The firm argues that trend is tied to the
entrance of large Wall Street firms into the market, which makes
it more stable. 

“Before institutional firms were actively trading crypto or
heavily involved (before 2018) bitcoin price differences between
exchanges varied as high as 4.5%,” said Danny Kim, head of
growth at SFOX. Now price differences are no more than one tenth
of one percent, according to SFOX.

SFOX

That stability is crucial as if there’s less price
fluctuation, then more merchants would feel comfortable about
accepting bitcoin, which may lead to wider adoption. 

A number of large Wall Street firms including Goldman Sachs
and ICE, the parent company of the New York Stock Exchange,

made headlines when they announced their intention to enter the
market for digital assets. Behind the headlines, large money
managers, hedge funds, and endowments have also been entering the
market.

A recent report by Grayscale Investments, a subsidiary of
Barry Silbert’s Digital Currency Group, showed a steady
growth of net inflows into its funds during the first half of
2018. More than half of the inflows this year came from
so-called institutional investors,
according to Grayscale’s report. 

Their entrance has been made possible by developments in
trading technology that has allowed high-frequency trading firms
(HFTs) and other market markers to double down on their crypto
efforts, Kim said .

“Some HFT firms have been trading since crypto 2014, but
have limited themselves because the infrastructure wasn’t
there.
Most if not all HFT firms require a FIX
connection (an advanced type of connection to an exchange) at an
exchange in order to trade efficiently,” Kim said. “Crypto
exchanges haven’t offered FIX connectivity until
recently.”

Equity exchanges, such as the New York Stock Exchange and
Nasdaq, allow traders to house their trading computers in the
same building as their matching engines. The service, known as
colocation, is becoming more common in crypto. For
instance, Gemini began offering colocation in 2017, followed
by Coinbase this year. Those developments could
help
 bring more price stability across markets
for digital assets, Kim said. 

“As this trend continues, the stabilizing effects of
institutional investment will extend beyond price spreads, and on
to price fluctuations,” Kim said. “Eventually, it could even come
to the point where Bitcoin could come to resemble the stable
coins people are looking to for payments and is used for Satoshi
Nakamoto’s original vision: a “Peer-to-Peer Electronic Cash
System.”

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