One Firm Is Way Ahead of Wall Street on Bitcoin
Posted June 5, 2018 10:21 p.m. EDT
SAN FRANCISCO — While a number of large financial institutions have discussed trading bitcoin, one firm has already begun doing it. Very quietly.
The financial firm, Susquehanna International Group in Bala Cynwyd, Pennsylvania, just outside Philadelphia, is one of the largest players in trading traditional investments like stocks, options and exchange-traded funds, or ETFs. Over the past two years, the privately owned company has also built up a trading desk of around a dozen people that buys and sells millions of dollars’ worth of bitcoin and other virtual or cryptocurrencies in private deals.
Now the firm is opening trading to a small group of its 500 clients, with plans to expand.
The move is the latest sign that the virtual currency markets, which were once relegated to the fringes of the financial world, are being embraced by big, mainstream investors.
The parent company of the New York Stock Exchange, the Intercontinental Exchange, has been in talks about opening a subsidiary for cryptocurrency trading, and Goldman Sachs is on the verge of opening its own trading operation.
But Susquehanna, which has around 1,800 employees around the world, has a lot more money backing its trading desk — and a lot more ability to interact with clients — than the hedge funds and trading firms that have also been early participants in the virtual currency markets.
The arrival of big financial institutions has raised concerns among some bitcoin aficionados, who worry that it will harden bitcoin’s status as a speculative trading asset like gold and diminish hopes that it can be used in day-to-day transactions.
Not so, said Bart Smith, the head of the digital asset group at Susquehanna. The firm believes bitcoin and other cryptocurrencies inspired by it are likely to have a wide array of uses, but for now, he said, bitcoin’s best bet is to challenge gold as a scarce commodity that can be moved around more easily.
The original bitcoin software determined that only 21 million bitcoin would ever be created. That cap isn’t expected to be hit until 2040, and the limited number of tokens currently in circulation has made the online currency appealing as a commodity.
Smith said he could also imagine bitcoin, or some competitor, becoming a digital payment method for the internet — as Jack Dorsey, Twitter’s chief executive, recently predicted — but he wasn’t too worried if that didn’t happen.
“We believe that this technology and this asset class is going to change some facet of financial services, and we think it is going to exist forever,” he said.
Susquehanna first experimented with trading bitcoin in 2014 after the investor twins Cameron and Tyler Winklevoss asked the firm about being involved with a bitcoin ETF that they had applied to regulators to create.
Regulators eventually denied that application. But Susquehanna kept its one bitcoin trader on board, and then added a few more last year when the cryptocurrency markets took off.
The firm decided to step up its operation, and go out to clients, after seeing the success of bitcoin futures contracts, which were introduced by exchanges in Chicago late last year and have been growing in volume in recent months.
Susquehanna will trade futures, which are contracts tied to the future price of bitcoin. It will also allow customers to buy and sell actual bitcoin and a few other cryptocurrencies like Ethereum and bitcoin cash.
To make these available to customers, Susquehanna recently amended the broker dealer license it has on file with regulators. That change will allow the company to trade cryptocurrencies that are labeled by regulators as securities. Regulators in the United States have recently indicated that many newly created virtual currencies — although not bitcoin — should likely be categorized as securities and traded only by regulated entities.
Most of the cryptocurrency exchanges where Susquehanna trades are largely unregulated. Bloomberg recently reported that U.S. authorities were investigating whether some traders were taking advantage of this to manipulate the price of bitcoin by posting lots of trades that they didn’t intend to complete.
Smith said he had not seen clear evidence of manipulation, but cryptocurrency markets are still very immature compared with the other markets where Susquehanna trades, especially given the lack of regulations for many of the largest exchanges holding cryptocurrencies.
He said the single biggest problem for sophisticated investors was the security risk in holding virtual currencies. In other markets, Susquehanna doesn’t have actual custody of stocks or bonds.
Bitcoin was built so that users can hold and transfer their tokens with a password or private key that no one else knows. If the private key is compromised, a hacker can take the coins, and the owner has no way to get them back. That has led to big losses at several bitcoin exchanges.
Susquehanna built its own systems for storing the cryptocurrencies it is holding for more than a day. To deter hackers, the private keys are kept in devices in an off-site facility that is not connected to the rest of the company’s computer systems.
“There were no financial services firms out there two years ago that were storing and moving large amounts of cryptocurrencies, so there is no road map,” he said.
Then there is the matter of trying to figure out on a daily basis what a single bitcoin or Ethereum token should be worth.
There is still little agreement on what factors traders should take account of when deciding on a value for cryptocurrencies, given that many of the expected uses for digital tokens are still hypothetical. While Smith’s teams look at the technical and security specifications of the coins, it is much harder to answer the most important question: Will they be used as something other than a digital commodity?
“The value is: What do you think the best-case scenario of these different digital assets is in the future — and handicapping what is the percentage chance that they will get there,” he said.