LA: Many first-comers to bitcoin trading simply had no other choice. First generation exchanges, such as MtGox, no longer exist, and other more professional centralized service providers have taken their place. If there is no central marketplace for a good or service, then the price discovery is largely obstructed. When something emerges in high demand, there are bound to appear more or less centralized venues competing for offering the best price of exchange for that item. Therefore price discovery becomes transparent, and supply and demand can meet on a level playing field.
MT: Large institutions are looking to launch regulated derivatives on bitcoin. How big of a threat will that be? Would your customers see this as an alternative or as a tool to hedge exposure they gain through the current platforms?
GS: We hedge our customer exposure on third-party exchanges so, for us, larger regulated exchanges are a benefit – the benefits we provide our customers is the flexibility to use those crypto assets to invest in other security types – something we believe is still a few years away from major institutions.
DM: We are a proponent of the regulated contracts. That is our only way to allow clients access. It’s necessary for the future stability of bitcoin. Customers - retail, commercial and institutional - that have a physical exposure will need a leveraged hedge. Companies like Expedia and Home Depot that accept payment in bitcoin would be smart to hedge their currency risk, similar to the way they hedge foreign exchange risk when conducting business internationally.
TW: The launch of a regulated derivatives market for bitcoin is crucial to the growth and health of this asset class. Gemini has entered into a partnership with the Cboe Global Markets (see “Bitcoin futures are coming,” page 42) to list cash-settled futures that will settle using Gemini’s auction price on bitcoin. Cash-settled futures contracts will enable Gemini customers to hedge their physical exposure, as well as provide a number of large and sophisticated market participants the ability to take directional positions in the asset class without needing to hold the underlying asset.
LA: Globitex is currently running an ICO or a Token Sale project with an aim to scaling the existing bitcoin trading venue into a global spot and derivatives exchange. Whether the large institutions manage to get there first depends on the regulatory ground, which they are bound by. Either way, regulated derivatives on bitcoin is precisely what the current market needs. In order for bitcoin to become relevant as a currency, it should be used as a medium of exchange and a unit of account for both goods and services across the spectrum of financial and also commodities markets.
MT: There have been several instances of theft in the cryptocurrency world. How concerned are you about security?
GS: Security is a major consideration when designing our processes. All cryptocurrency funds we hold are stored in offline wallets with signing carried out on a multi-sig basis before transmission onto the blockchain. This slows the process down a little but adds significantly to the security level. The other problem we deal with on a continual basis is counterparty risk. Because of the less regulated nature of the counterparties, we have strict position limits with each exchange to manage exposure in the event of a counterparty failure.
DM: Very concerned. The current infrastructure is simply not suitable for long-term and mass adoption. Buying a bitcoin on a lot of the current platforms seems like buying a Rolex from someone on the street.
TW: We have spent years building our security system to ensure we are meeting our fiduciary obligations, which of course includes protecting clients’ assets against theft. The majority of client assets are held offline using Gemini’s proprietary Cold Storage system.