Bitcoin. Ether. Ripple.

The list of tradable cybercurrencies goes on and on and everyone seems to be talking about these new securities as much as President Donald Trump and his Tweets these days. As the search for yield and alpha remains a central focus among institutional investors and the dreams of striking it rich are the focus for Joe Q Public, bitcoin remains the crypto everyone is talking about.

However, just recently there has been a pullback in these nascent markets. Bitcoin has lost about half its value since December – toppling from its high of $19000 to about $10000. Other cryptos are also in play, as Ripple, Ethereum and others are making news as alternative currencies with upside potential.

And the crypto trading universe continues to expand. Republic Protocol, a new blockchain project with ties to Kyber Network and other well-known projects in the space, has announced they will be building a decentralized dark pool for the trading of crypto assets. Initially, the company will allow large-scale trading between bitcoin, Ethereum and Ethereum-based tokens on a hidden order book, while on a public blockchain, to not affect the pricing of those assets.

In equities, dark pools are estimated to represent approximately 10-15% of the trading volume of all US stock trades.

Cryptocurrency trading has exploded recently, as daily trading volume has reached approximately $50 billion with a total market cap over $750 billion in upwards of 100 cryptocurrencies. With institutional investors arriving into the cryptocurrency market, the development of alternative trading systems is critical for trading large blocks of cryptographic assets while maintaining minimal price slippage and market impact.

Republic Protocol is proposing a decentralized open-source dark pool protocol facilitating atomic swaps between cryptocurrency pairs across the Bitcoin and Ethereum blockchains. Trades are placed on a hidden order book and are matched through an engine built on a multi-party computation protocol. This provides order execution without exposing market sensitive information such as price and volume at a certain position, which would provide an advantage to other traders.

Republic removes the need for a trusted intermediary to operate a dark pool and provides crypto-economic incentives through a protocol token for governance; enabling the development of a secure, decentralized, scalable dark pool protocol capable of handling billions in trading volume daily.

“Dark pools represent a large percentage of daily trading in traditional financial markets for a reason,” said Taiyang Zhang, CEO of Republic Protocol. “A dark pool enables institutional traders to protect their hand from public view while not adversely affect market prices when they are buying and selling large orders. We feel like there is an incredible opportunity to apply this proven concept to the world of cryptocurrency trading while also utilizing the inherent security of the blockchain.”

But, there are concerns in this new and completely unregulated market. Just this week, BitConnect, a cryptocurrency exchange closed it trading and lending platforms. On its website, BitConnect blamed media reports and a pair of Cease and Desist Letters it had received from Texas and North Carolina as the chief reasons for the closure.

However, the crypto world is also contending with mounting scrutiny from US regulators such as the Commodities Futures Trading Commission and Securities and Exchange Commission. Both bodies issued public statements about the danger of crypto trading and investing and are holding public hearings to discuss these matters. Also, there will be Congressional hearings on the crypto universe and its potential problems in the coming weeks.

And while it is just in the last few months people have been jumping on the bitcoin wagon and the currency has joined the vernacular, that is not to say that bitcoin and crypto trading are new. Back in 2015, Pantera Capital’s Dan Morehead discussed with Traders Magazine how he traded the then unheard-of security.


This article originally appeared in the January 2015 edition of Traders Magazine

Bitcoin Never Sleeps: How Pantera Capital’s Dan Morehead Trades The Digital Currency

Bitcoin-focused hedge funds must deal with the challenges of long-term investments. And the trading is relentless.

By Rob Daly

Regular headlines of high-profile bitcoin (BTC) thefts and legally questionable activities might have dulled the appetite of some institutional investors for digital currencies, but Dan Morehead has bet the future of his hedge fund on them.

“The value of bitcoin, if successful, is much greater than the downside risk,” said the founder and CEO of Pantera Capital. “It seems to be an asymmetric opportunity.”

Morehead decided to close the 10-year-old firm’s existing global macro funds and open a pure bitcoin-only investment fund in 2013, two years after being introduced to the most famous and infamous virtual currency. Since then, the fund’s assets under management (AUM) has grown to $150 million, which includes outside investments from venture capital firms Benchmark Capital, Fortress Investment Group and Ribbit Capital.

Unlike speculators who helped drive the initial bitcoin spot trading from a start of $0.07 per bitcoin to a peak of approximately $1,166 per coin in late 2013 and then down to around $230 per coin at press time, Morehead views bitcoins as a “buy and hold” investment.

According to Morehead, digital currencies are the capstone of the Internet’s evolution. “Until the introduction of digital currencies, the Internet had protocols to move all types of data around except for value,” he explained. “Digital currencies are that protocol.”

He likened the growth in digital currencies to the growth of the TCP/IP networking protocol in the mid-1990s, but with a price feed.

“The Internet at that time had all of the protocols it needed to be really cool, but you couldn’t do anything because you had a modem screaming at 2,400 bits per second,” Morehead said. “The Internet really sucked. Bitcoin is kind of like that right now. It has all the need attributes but just not all of the applications to make it useful.”

Potential killer apps will include mobile payments, micropayments and cross-border remittance.

This is not science fiction,” he argued. “More than 45 percent of Kenya’s gross domestic product is processed over cellphones. That proves that mobile money works.”

Morehead acknowledged that bitcoin could fizzle, but the need for digital currencies still remains.

Of the top 100 tradable digital currencies, bitcoin is in the strongest position amongst its peers. The digital currency began trading in early 2010, boasts a current market capitalization of $3.1 billion, and only 14.2 million of the eventual 21 million bitcoins are already in circulation.

After Ripple, the market capitalization for the remaining 98 currencies drops offs precipitously from $70 million to $158,000, according to the Crypto-Currency Market Capitalizations website.

Bitcoins and More

As an early entrant into the bitcoin market, Pantera had few investment options but to invest in the digital currency itself.

“Most of the bitcoins we purchased, we purchased directly via telephone conversations,” Morehead explained. “We also do a lot of exchange-based trading, and we prefer to trade on Bitstamp.”

Typical bitcoin block trades might be quoted “Bitstamp less 1%,” he explained.

Over the past few years, however, Pantera has diversified its investments and has made early stage investments into the companies that help the bitcoin ecosystem grow.

Earlier this year, the total market capitalization of these companies surpassed bitcoin’s current $3.1 billion market cap. “U.S. equities are worth about four and a half times the value of money supplied,” he said. “U.S. equities are much more mature than bitcoin startups, so bitcoin startups could be worth much, much more than U.S. equities relative to money supply.”

Although Pantera does not invest in bitcoin derivatives, they remain an option for institutional investors that want exposure to bitcoin without holding the underlying digital currency. And there are exchanges and firms to help these types of investments.

Swap-execution facility (SEF) operator TeraExchange launched trading in a number of cash-settled non-deliverable USD/BTC forward contracts in September 2014.

ore recently, the Bitcoin Investment Trust (GBTC) exchange-traded fund (ETF) began trading on the OTC Markets stock market on May 11, while the market waits for brothers Cameron and Tyler Winklevoss, of The Social Network fame, to launch their Winklevoss Bitcoin ETF (COIN), which will be listed on Nasdaq.

Trading: Easier Said Than Done

There are more than 70 electronic-trading venues where bitcoin investors can trade against more than 28 global currencies. The digital currency market may refer to these platforms as exchanges, but they should not be confused with regulated futures or equities exchanges.

The U.S.-based venues that want to operate above board are regulated as money-transfer businesses, which are regulated at the state level. There is no direct regulation by the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission, but they do need to register with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

Bitcoin’s decentralized market structure makes it difficult to get a macro view of the market since each trading venue represents a tiny percentage of overall trading volumes. Yet several trading venues – Bitfinex, Bitstamp, BTC-e, itBit, Coinbase Exchange, Kraken, LakeBTC and OKCoin – have captured the mindshare of bitcoin traders.

Market data aggregators publish a subset of these venues’ price feeds. Bloomberg publishes price quotes from Bitstamp, Coinbase, itBit and Kraken on its Bloomberg Professional platform, while Thomson Reuters Eikon users will find quotes from Bitstamp and itBit.

“Given Bitstamp’s size, its quote is relatively indicative of the market,” said Ron Leven, head of Eikon foreign-exchange and economic content at Thomson Reuters.

“Those were the ones that were able to satisfy our demands as contributors,” added Tod Van Name, global head of foreign-exchange and commodities electronic trading at Bloomberg.

All of these quotes are for USD/BTC trades. According to data collected by the Bitcoin Charts website, U.S. dollar-denominated trades represent 48 percent of bitcoin volume, while China’s internal yuan (CNY) and the European Union’s euro (EUR) represent 33 percent and 6 percent, respectively.

However, the market-data vendors are not beating the bushes to find markets to include in their offering. There is no dearth of bitcoin-trading venues that want their feeds distributed by market-data vendors.

Since there are low barriers to entry to become a trading venue, the list of new exchanges that have popped up goes on and on, according to Van Name: “There have been a number of pseudo-exchanges that have been nothing more than a server running in someone’s basement.”

Thomson Reuters also publishes the NYSE Bitcoin Index (NYXBT), which the exchange operator launched in May. The New York Stock Exchange (NYSE) uses algorithms on data provided by Coinbase, in which it has a minority interest, to determine the price of one bitcoin in U.S. dollars at 4 p.m. London time and then distributes it via the exchange operator’s Global Index Feed.

NYSE’s Index Committee, which oversees the rules and methodology behind NYXBT, also plans to identify and review additional data sources for the index, according to exchange officials.

Meanwhile, TeraExchange launched its Tera Bitcoin Price Index at the same time it started to support trading in bitcoin NDF contracts in September 2014. The SEF’s index sources its data from 14 different bitcoin trading venues that have signed information-sharing agreements with Tera.

Tera signed all of these agreements to meet the Commodity Futures Trading Commission’s requirement that the index would “not be readily susceptible to manipulation,” said Christian Martin, president and CEO of TeraExchange.

Chicago-based North American Derivatives Exchange (Nadex) signed a licensing agreement with TeraExchange at the end of 2014 to use the index in its binary-options market.

The Bitcoin Price Index (BPI) published by online bitcoin-news site CoinDesk dates back even further. The publication launched the real-time index in 2012, but contains historical data back to 2010, according to Jon Matonis, an editorial board member of CoinDesk.

“The BPI is not a black box; we publish all of its criteria on our website,” he said. “We actively manage and curate the BPI to reflect the best possible prices from the available exchanges.”

CoinDesk sources data from Bitstamp, Bitfinex, BTC-e, LakeBTC and OKCoin for its USD/BTC index, and from BTCChina, Huobi and OKCoin for its CNY/BTC index.

Over the past three years, the index administrators have rebalanced the index eight or nine times. “Some of the changes are minor tweaks,” Matonis said. “We publish those in a change log that is available on BPI’s homepage.”


Trading bitcoins and other digital currencies is similar to trading other fiat currencies, but it has its own quirks, according to Pantera’s Morehead.

Most of the fund’s traders are experienced FX traders, he added: “Our main trader, who started 10 years ago, started trading currencies and then equities and commodities for us.”

Bitcoin traders can rely on some of the standard FX-analysis tools, such as beta estimation and correlation analysis, according to Thomson Reuters’ Leven. “There’s enough data so that you can get reasonable indications of these types of statistics,” he said.

“Using technical analysis with bitcoin has always been popular,” agreed Bloomberg’s Van Name.

Where digital currencies differ from their fiat counterparts is in other fundamental analysis, Van Name added. “There is no economics associated with bitcoin because it’s not tied to one country, while other currencies are based on GDP growth, interest rates or the credit or equities markets of the currency’s issuer,” he explained. “There is none of that here.”

Bitcoin may be nationless and not backed by any central banks, but CoinDesk might have a solution in the works.

According to CoinDesk’s Matonis, the publication is examining if an interest-rate benchmark like the London Interbank Offered Rate (LIBOR) is feasible; he has dubbed the new benchmark the Bank Interbroker Offered Rate, or BIBOR.

“If people will need a referenceable exchange rate, they will need a referenceable interest rate,” he said. “It’s currently about 32 percent annually. You would earn more money than you would on Greek bonds.”

The second characteristic that separates digital currencies from fiat currencies is their trading hours: Bitcoins never sleep. Unlike the regular FX market, which begins trading at 8 a.m. Monday morning in Tokyo and ends at 4 p.m. Friday afternoon in New York, digital currencies trade at all hours every day of the year. “When we are trading, it’s 24 hours a day,” Matonis said. “It trades on Christmas Eve and on New Year’s Eve.”

Such is the price bitcoin traders pay to capture the transactional pushes that affect the illiquid digital currency more than fiat currencies, Morehead added.

Bitcoin already cost Morehead one New Year’s Eve when the new fund needed to be audited at the end of 2013.

“I spent until midnight in the office with Ernst & Young auditors transacting bitcoins,” he recounted. “It’s definitely a hard-working currency.”



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