How all of these post-ICO companies will (convert and) spend their “millions” (of nothing)?
The market for ICOs has exploded to $1.8 billion. Tech company Paragon is set to release information about itself and its planned initial coin offering, a red-hot cryptocurrency-based fundraising method, on August 15, according to a video tweeted by The Game on Thursday. Standing alongside Paragon CEO, Jessica Versteeg, a former model and Miss Iowa 2014, the rapper said the firm was preparing to “revolutionize cannabis and the world.”
“Downtown” Josh Brown, the chief executive officer of Ritholtz Wealth Management and author of a popular finance blog, has long been skeptical of the digital currency. He finally bought some. Still, Brown, who helps manage half a billion dollars, isn’t really a convert quite yet, especially when it comes to security measures at bitcoin exchanges.
Even as investors are lured by their price gains and volatility, the biggest institutions are reluctant to get in, raising further concerns about liquidity. The challenge for exchanges like Coinbase and Gemini Trust Co. is persuading major financial players that the $121 billion market for digital assets meets 21st Century standards.
Cumberland Mining, a unit of Chicago-based high-frequency trading firm DRW Holdings LLC, handles many big orders privately “because the exchanges and other marketplaces can’t handle that type of liquidity or don’t have that type of liquidity,” said Bobby Cho, a cryptocurrency trader at Cumberland. “The marketplace is so fragmented that liquidity is fragmented.” The hype, however, sometimes outstrips the reality.
“It’s the Wild West, it’s very much early days still,” said Richard Johnson, a market-structure analyst at Greenwich Associates who specializes in blockchain. Johnson agreed that the time and complexity of moving digital currencies from one exchange to another is “not acceptable” given how modern investors operate, and that while Gemini, Coinbase’s GDAX and other U.S.-based exchanges have strong know-your-customer procedures, more needs to be done. “If people want to get serious about this for real banking transactions, it needs to be better and easier to use.”
Adam White, general manager for GDAX, said the company only allows fully collateralized trading and should be thought of as a spot market. That means if a Coinbase user doesn’t have the cash to cover the whole trade, it doesn’t happen. Coinbase has also acquired about 35 money transmitter licenses from U.S. states that require them, White said. The exchange acts as a custodian to many of its users and stores several billion dollars worth of digital assets, according to White. Keeping those funds safe is Coinbase’s №1 priority, White said. Still, he acknowledged the spotty history of digital asset exchanges.
DV Chain, a sister company to DV Trading in Chicago, handles most of its cryptocurrency trading volume off-exchange, said CEO Garrett See. While DV does transact on a number of platforms, lack of liquidity and the quality of the technology can be a problem on exchanges, he said.
“Some of these exchanges take seconds or sometimes minutes between when you click to buy and when your order makes it to the exchange, if it makes it at all,” See said. Because there are so many exchanges, “liquidity is distributed across lots of different places,” he added. If the market got to a point where there was a centralized exchange and all the volume is there, “then I don’t think you’re going to see flash crashes like that as much,” See said.
See and Cumberland’s Cho are exactly the type of market makers that digital exchanges need, yet the adage of “liquidity builds liquidity” is a tough problem to solve. “Market makers play that role, of bringing agility and efficiency to the marketplace,” said Javier Paz, a senior analyst at Aite Group LLC. “The role of a liquidity maker requires at the very least close rapport with cryptocurrency exchanges,” Paz said.
“It’s so early it should be expected” that there are things that still need to be done, he said, “but that’s what the institutional guys are finding as they tiptoe into the space.”