‘Bad things could happen’: Turning to tech to tame the crypto jungle

© Reuters. Joel Fruhman, right, and Dan Fruhman, directors of BCB Group pose for a photograph in London © Reuters. Joel Fruhman, right, and Dan Fruhman, directors of BCB Group pose for a photograph in London

By Tom Wilson

LONDON (Reuters) – “Hi guys, could you please show me a firm bid for 100 bitcoin?” a seller texts on Skype.

“One sec. $ 10270.”

Two minutes later: “Sorry guys, that was an old order from Friday when skype wasn’t working.” 

“I really think we should get off skype. Bad things could happen. Someone is going to make an expensive mistake.” 

*****

A messaging exchange over a potential $ 1 million deal, between a European asset manager looking to sell bitcoin and broker Joel Fruhman, illustrates the casual and often chaotic nature of cryptocurrency dealmaking.

Trades involving hundreds of thousands, or millions, of dollars are routinely struck via brief chats on apps like Skype, WhatsApp, WeChat or Zoom, often with scant certainty over the identities of participants or the legal basis of agreements.

“We’d end up in a Zoom call with about five ‘introducers’ – we didn’t really know who any of them were,” said Fruhman, a physicist by training who started a cryptocurrency brokerage business with his brother Dan in their British hometown of Manchester in 2018.

“And who were we? What was our credibility?”

Over-the-counter (OTC) trading – buying and selling through a broker – is now beginning to change, however.

It is moving toward electronic automation as the cryptocurrency sector matures from the province of online enthusiasts to emerging financial assets drawing increasing mainstream interest, Reuters interviews with more than a dozen industry players show.

This is a fundamental shift, as messaging apps have for years been the predominant platforms.

It is a key front in attempts by cryptocurrency enthusiasts with roots in the traditional finance industry to drag into the mainstream a singular, largely unregulated sector born on the web a decade ago as a symbol of rebellion against the establishment and offering users near-anonymity.

OTC trading is favored by big investors like hedge funds because cryptocurrency exchanges often suffer from thin liquidity, and large buy and sell orders can move the market.

But the opaqueness of the messaging process and its impracticality for use on a large scale, plus the glitches that could cause the “expensive mistake” warned of by Fruhman, have left it fraught with risk.

Now, as spreads – the differences between bid and ask prices for immediate orders – tighten as liquidity in crypto markets grows, OTC brokers and market makers are seeking to move away from unsophisticated chats and offer quotes electronically, with automated execution and settlement.

“Things have shifted quite rapidly toward electronic trading,” said George Zarya, CEO of London-based cryptocurrency exchange BeQuant, which also runs an OTC desk and is planning to switch toward automation.

“Anything that is liquid – bitcoin or ethereum – these markets are going to go electronic. That’s a natural path that traditional markets have gone through.”

The changes are likely to appeal to larger investors using algorithms and high-frequency trading for whom split-second timings are important, according to the interviews with cryptocurrency OTC brokers, market makers and investors.

Alameda Research, a crypto trader based in California and Hong Kong, launched an almost entirely automated OTC desk around six months ago that is already seeing flows of $ 20 million-$ 30 million a day, said Ryan Salame, its Asia-Pacific head of OTC.

For Salame, the future of OTC trading is electronic, with prices for all but the smallest coins to be quoted electronically.

“This is just the next step how you stay more competitive. Each desk is trying to be more competitive and making better systems,” he said. “It’s just a by-product of spreads coming in so much that I can’t update in the chat fast enough to give people the pricing they’re expecting.” 

‘CAN YOU SELL A FEW MILL?’

The Fruhman brothers, Joel aged 29 and Dan 28, built a contact book packed with bitcoin miners they met on internet forums and apps as they grew interested in the emerging technology.

Miners use computers to solve complex mathematical puzzles, competing against others and earning rewards in the form of new digital coins. As recently as a few years ago, individual crypto enthusiasts could mine bitcoin from their bedrooms.

But many had a problem, the Fruhmans found: They were producing bitcoin faster than they could convert them to the cash they needed to clear the hefty electricity bills run up by their high-powered computing gear working overtime. 

“We saw something very clear: A bunch of guys with a lot of bitcoin valued in USD, who had no idea how to turn that into money,” said Joel. “It started with one request, which was just one of these guys, our mate, who was like: ‘Can you sell a few mill?'”

Late last year, in an attempt to tap bigger investors and offer more sophisticated back-office services, the brothers swapped their contact book for a stake in a startup run by ex-financiers well-versed in the infrastructure of the financial system, from escrow accounts to settlement systems.     

The startup, BCB Group, then based in London’s financial district, offered something the Fruhmans lacked: regular access to clients from mainstream finance willing and able to buy the regular supply of digital coin offered by their mining contacts.

“It’s not the stoned 22-year-old that we were dealing with a year and a half ago,” said Joel. “And it’s not the equity traders, the Goldman Sachs (NYSE:). They’re kind of in between – it’s growing from one into the other.”

    

TRADE BLOSSOMS IN BITCOIN BUBBLE

Global cryptocurrency trading volumes are highly erratic. Over the past year, bitcoin alone – by far the largest coin – has seen daily volumes of between $ 900 million and $ 3 billion, according to research firm Coin Metrics.

Brokers estimate the OTC market typically accounts for 10% to 30% of global volumes on any given day.  

The OTC market blossomed as bitcoin’s value soared during its 2017 bubble. That was when miners, wealthy individual investors, hedge funds and companies earning revenue in crypto grew active in the market.

Now, said the industry players who spoke to Reuters, the market is seeing a new shift as the predominance of messaging apps wanes and the more sophisticated tools used in traditional markets like equities and bonds become increasingly common. 

“Doing stuff over Skype and over these voice chats is not really scalable,” said Kevin Zhou, co-founder of San Francisco-based OTC desk Galois Capital.

The evolution is partly being driven by newer entrants to the sector, many of whom are tooled up with cutting-edge tech. Some, like Chicago-based Jump Trading, are from the traditional proprietary trading worlds. Others, such as Alameda Research, specialize in cryptocurrencies. 

And the changes are popular with big investors.

“I prefer to use electronic because all our algorithms are fully automated,” said Andrea Leccese, president of Bluesky Capital in New York, an investment firm that often runs orders of $ 5 million-$ 10 million through OTC desks. “If we can send our quote electronically to the OTC broker, it’s much better for us.” 

“It’s fair to say more or less half of OTC trading is going through technical innovation like making fully electronic platform, and that’s even better on our side.” 

Cryptocurrency regulation is patchy across the world, with curbs on the illegal use of digital coins the priority, and the implications of increasing automation in OTC trading are unclear. But, some market players say, because the changes are likely to attract more mainstream investment they could be a factor in speeding up the introduction of the kind of securities rules seen in traditional markets.

MACHINE VS MAN

While increasing automation may be inevitable, many OTC desks are in a bind. Some clients are loath to ditch the personal relationships they have established with their brokers and the apps they use to communicate.

New York-based Genesis Global Trading sees around $ 1 billion a month in volume, CEO Michael Moro said. While that’s down from the $ 2 billion-$ 2.5 billion a month during bitcoin’s 2017 boom, volumes are now rising between 10% and 20% a month.

Genesis uses TradeBlock, a New York firm that provides tools for trading cryptocurrencies, to execute its deals – but can’t completely abandon messaging apps.

“We will give market color over (Skype), but the actual transactions are over TradeBlock,” Moro said. “When your clients that are buying $ 5, $ 10 million say, ‘Hey, let’s just chat on Skype’, to get them to change their behavior and say, ‘No, we don’t do Skype’, you end up creating a friction.”

For the Fruhman brothers, personal relationships will remain key. 

“The plan is to go to an automated platform, where they’ll be able to request quotes on our front-end website,” said Dan. “But the interesting thing is that a lot of people actually like the human-to-human interaction.” 

“It’s not just ‘like’,” said Joel, quickly. “If you’re trading $ 20 million, you’re not clicking a button – you want to push on the price, you want to get a feel, you want to maybe break it up.”

“I think there’ll always be this human OTC component for institutional clients.”

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Crypto Currencies Fall as Facebook Faces Congress Over Libra

Investing.com – Cryptocurrencies traded lower on Tuesday as Facebook (NASDAQ:) was called to Congress to testify on plans for the launch of its digital coin Libra.

Total cryptocurrency market capitalization fell to $ 280.23 billion by 11:06 AM ET (15:06 GMT), compared to $ 292.38 billion a day earlier.

fell 1.4% to $ 10,409.2 on the Investing.com Index, lost 5.8% to $ 217.40, slid 4% to $ 0.30629, while declined 5% to $ 86.852.

At the time of writing, David Marcus, who heads the Facebook (NASDAQ:FB) division overseeing the Libra launch, was testifying to the Senate Banking Committee.

Facebook has been under regulatory siege since it announced plans to launch its own alt coin, and U.S. Treasury Secretary Steve Mnuchin on Monday warned that the company will face much tighter regulatory scrutiny if it ever offers digital financial services, saying that it “must implement the same anti-money-laundering safeguards in countering the financing of terrorism as traditional financial institutions”.

Mnuchin’s comments echoed a tweet from U.S. President Donald Trump who came out last week with an attack on cryptocurrencies in general. In the same thread, he warned that “if Facebook and other companies want to become a bank, they must seek a new banking charter and become subject to all banking regulations”.

Commenting on Facebook’s appearance before Congress, Allianz (DE:) Chief Economist Mohamed El-Erian showed little surprise at the scrutiny.

“Due to money laundering risks, it was a matter of time until ‘crypto’ initiatives – such as Facebook’s Libra – triggered a regulatory response,” he explained. “Advocates must convince politicians that, rather than ‘currencies’, such initiatives can be a well- monitored part of the payments eco system.”

In his testimony, Marcus sought to do just that while assuring U.S. lawmakers that it plans to hold off on the launch until regulatory concerns are fully met.

“Digital currencies, such as that of Libra, can fit within a regulatory compliant framework in the U.S. today,” he said, while also suggesting that current regulations were creating an unnecessary obstacle to progress.

“Many banks have tried to fix the slumbering payment system and some are attempting to create their own blockchain-based alternative systems, but regulatory barriers have slowed the progress of these projects to a crawl comparatively,” Marcus warned.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Rapid bitcoin rally cheers crypto market investors, others wary

© Reuters. FILE PHOTO: A collection of Bitcoin (virtual currency) tokens are displayed in this picture illustration © Reuters. FILE PHOTO: A collection of Bitcoin (virtual currency) tokens are displayed in this picture illustration

By Tom Wilson

LONDON (Reuters) – hit its highest level in 10 months on Tuesday, raising hopes among cryptocurrency enthusiasts of greater mainstream acceptance as an escalating U.S.-China trade war roiled global markets, but others urged investor caution.

Bitcoin, which lost three-quarters of its value in 2018, has soared by 24% since Friday and more than doubled in price so far this year. At 1612 GMT it was up 0.8% at 7,874..

There was no obvious reason for the sudden rise with the opacity of cryptocurrency markets rendering it virtually impossible to prove or disprove any theories.

Some traders said investors moved money to bitcoin, treating it as a safe haven as traditional financial markets stumbled on fears that a worsening Sino-U.S. trade dispute could derail the global economy.

But none of the four traders that Reuters spoke to could produce evidence to support that claim.

“Some say buying bitcoin could be a flight to safety for people who view it as a gold-type asset,” said Aliya Itzkowitz at crypto research firm Enigma Securities.

“I don’t subscribe to that view. I view bitcoin as a high-risk, high-growth asset – a bet on an emerging technology.”

Some traders said the prospect of major firms, including Starbucks (NASDAQ:), to accept digital money were fuelling hopes that bitcoin would gain use among mainstream consumers – something that has previously eluded it.

Others cited reports that Fidelity Investments would soon offer cryptocurrency trading for the rally.

Unexplained price swings have been par for the course during bitcoin’s first decade. Just last month, bitcoin had its biggest daily gain for a year, leaving investors puzzling over the cause of the move.

Whatever the reason, price moves of such dramatic scale are a reminder that cryptocurrencies remain a highly speculative market where prices are not linked to factors such as technological development, some industry officials said.

“I don’t like to see these price swings. They are not healthy,” said Nicholas Gregory of the blockchain company Commerce Block. “Whether that’s happening because they believe in the tech, or people hedging – you just don’t know”.

The lack of transparency in crypto markets could thwart hopes that digital money can progress from speculative tokens to an asset accepted by mainstream investors, some analysts said.

“If most of the regulators and traders themselves are only vaguely aware of what is likely to happen in the next few days or weeks, then clearly the levels of risk associated with investing are very high,” said Windsor Holden of Juniper Research, an analysis firm specializing in fintech.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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