To Make Bitcoin/Blockchain Work, Fix the Exchanges

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Posted: Feb 09, 2018 9:35 AM
To Make Bitcoin/Blockchain Work, Fix the Exchanges

At this point, the cryptocurrency explosion is well-documented. In 2017, crypto-investors added more than $500 billion to the cryptocurrency market cap, and they catapulted the once esoteric industry into the mainstream consciousness. Of course, crypto markets weren’t the only financial vehicle outperforming expectations. The stock market hit a string of continual highs, and nearly every investment seemed to be on a no-end-in-sight winning streak. 

Interestingly, while the stock market is being propelled by institutional investors crypto markets are primarily comprised of individual investors who are captivated by the seemingly unending possibilities of this newfound investment medium. This is demonstrated by the droves of new investors flooding crypto exchanges. Binance, the second largest crypto exchange by transaction volume, recently reported upwards of 250,000 new user registrations in a single day. They were joined by Bitfinex and CEX.io in the list of crypto exchanges that had to halt new account registrations temporarily because of excessive volume.

In perhaps the most telling expression of the surge of individual investors, Coinbase CEO Brian Armstrong recently told The New York Times that “we can’t guarantee that the website’s going to be up exactly when you need it.” In short, crypto markets are swarming with individual investors. However, that notion is starting to change.

In December, Cboe Group and CME Group launched the first Bitcoin futures contracts. These contracts allow investors in traditional markets to bet on Bitcoin’s future price. In addition, Goldman Sachs announced that it plans to open a cryptocurrency trading desk. According to a Bloomberg report, the bank aims to get the business running by the end of June, if not earlier.” Even renown crypto-skeptic, JP Morgan Chase CEO Jamie Dimon, recently walked back his infamous comments about Bitcoin being a fraud. 

Institutional investors are beginning to integrate with cryptocurrencies, but significant changes are still necessary before crypto investment is on par with traditional investment methodologies. This is completely understandable. For all the enthusiasm surrounding cryptocurrencies, there have been several instances of cryptocurrency fraud, manipulation, or even illegal activity that are spooking traditional financial institutions.

In 2014, cryptocurrency exchange Mt. Gox was forced to declare bankruptcy just one day after more than $500 million worth of Bitcoin was stolen from its platform. More recently, the ongoing class-action lawsuit involving Tezos, an Initial Coin Offering that went terribly wrong, is lingering into its second year. 

Just this week, The Wall Street Journal reported that federal regulators are putting a stop Dallas-based ICO because its owners violated several federal laws. The company’s ICO featured some of the hallmarks of suspicious deals that the SEC has repeatedly warned about,” the report contends. 

Perhaps most shockingly, cryptocurrency reporting juggernaut CoinMarkeCap roiled crypto markets in January when it removed cryptocurrency prices from South Korea because of severe price discrepancies between South Korean exchanges and others from around the world. Many cryptocurrencies endured double-digit price reductions in the wake of this move. There is a reason that the only mainstream crypto investments are derivatives. Any of these moves could be enough to spook traditional financial institutions, but as a collective, they are severely hindering more conventional investors and their organizations from entering crypto markets directly.

Fortunately, cryptocurrency institutions can fix this themselves. Some platforms are moving the industry in the right direction. For example, Legolas created a bank-backed cryptocurrency exchange that provides transparency and clarity to the cryptocurrency buying experience. The blockchain, the powerful technology that enables cryptocurrencies to operate, has numerous advantages, but its emphasis on privacy and can sometimes be more of a hindrance than a help when it comes to clarity during the buying process. Therefore, Legolas combines the features of a centralized service with the security and functionality of a decentralized blockchain. Platforms like this can help bridge the gap between the standards that traditional investors expect with the opportunities that crypto markets offer.

At the end of the year, notable Bitcoin investor and CNBC contributor, Michael Novogratz, predicted that “Bitcoin could be at $40,000 by the end of 2018. It easily could.” Whether it does or not, Bitcoin and the many other alternative digital currencies that comprise the cryptocurrency ecosystem represent one of the most compelling investment opportunities of our generation. 

Crypto markets will further proliferate as institutional investors get in the game. However, the crypto ecosystem will have to clean up its act first. In some ways, seems like whoever can achieve this first will be the real winner in the race for the future of finance.