A trader works with telephone receivers in the crude oil and natural gas options pit on the floor of the New York Mercantile Exchange in New York, April 5, 2011. REUTERS/Shannon Stapleton
The explosion and maturation of the cryptocurrency market has institutions pouring money into the space.
Firms such as DRW, a Chicago-based trader, and B2C2, a UK-based over-the-counter broker, are now regularly executing multi-million dollar trades.
“We got a call for a $50 million trade last week.”
Kevin Beardsley isn’t talking about an equities deal, or a bond trade, or a currency bet. Beardsley is the managing director at B2C2, an OTC trading firm, and he’s talking about bitcoin.
Bitcoin has risen 600% since the beginning of the year, and now big firms are jumping on the cryptocurrency bandwagon. That’s having an effect on the size of trades executed by bitcoin trading desks around the world, and driving up the demand for over-the-counter (OTC) brokers, who specialize in larger trades.
Such trades are commonplace in big, actively traded markets, like for shares of companies — where they’re called block trades — or bonds. And by those standards the bitcoin trading is still mostly relatively small — around $1 million or less — compared with hundreds of millions worth like you might see with a stock trade.
According to Maxime Boonen, a former interest rate swaps trader at Goldman Sachs who founded B2C2 in 2015, OTC bitcoin trade sizes have increased this year as interest in cryptocurrencies from institutional clients, such as asset managers, has buoyed. As such, larger million-dollar trades are more common at B2C2 than they were when the company was founded, according to Boonen.
It’s a similar story at Cumberland Mining, the bitcoin trading arm of DRW, a Chicago-based market maker that ordinarily trades in the world’s biggest markets. DRW regularly facilitates bitcoin trades in the $1 to $5 million range with trades in the $20 to $50 range being viewed as the “gold standard” ceiling.
“We are long bitcoin with our average transaction well north of $100,000,” Bobby Cho, the head of OTC trading at Cumberland, said.
The main driver for this newfound interest, according to Boonen, is straightforward.
“It’s a feel good story,” he said. “Bitcoin is always going up and institutions are being asked by their clients to get in.”
Such newcomers see the explosive growth of the cryptocurrency market, which has grown from $17 billion at the beginning of the year to $200 billion, as an attractive alternative to the low-yield environment on Wall Street.
According to Lex Sokolin, a partner at Autonomous NEXT, a fintech analytics provider, companies looking to liquidate the millions of dollars raised from initial coin offerings, a red-hot cryptocurrency based fundraising method, are also bringing big trades to OTC desks.
ICOs allow companies to raise ethereum, another cryptocurrency, by issuing their own cryptocurrency to participants or investors. In some cases, companies have raised hundreds of millions of dollars.
“If they are looking to liquidate some of that ethereum into cash to run their business, then they’re going to go to an OTC,” Sokolin.
Trevor Koverko, the CEO of Polymath, a cryptocurrency company, for instance, told Business Insider his company liquidated a small portion of the ether holdings it raised into fiat via an OTC.
Boonen said the firm has ICO-funded companies coming to them “all the time.” But they are very conservative about the ICO-funded companies for which they provide services.
This is just the first wave
The market, according to Boonen, is currently witnessing the first wave of institutions entering the fray.
“This year we’ve seen more nimble asset managers and brokers who deal with retail come to us,” he said. “That’s where it starts.”
The next wave will come as the infrastructure around bitcoin continues to develop with new products such as futures, which two exchange groups have said they were preparing to launch this year, and an exchange-traded fund. An ETF would allow retail investors to more easily invest in crypto.
Cumberland’s Cho sees an ETF on the horizon over the next 12-months.
“What can happen of the back of [bitcoin futures] is an ETF,” he said. “There’s tons of capital sitting on the sidelines for an ETF.”