Many crypto enthusiast long for a day when bitcoin will replace the entire financial system. But in the meantime, Wall Street might actually be helping the digital asset’s long term adoption, one firm says.
New data from SFOX, the cryptocurrency trading technology firm, shows that 2018 has witnessed a drop-off in price variations on digital asset exchanges. The firm argues that trend is tied to the entrance of large Wall Street firms into the market, which makes it more stable.
“Before institutional firms were actively trading crypto or heavily involved (before 2018) bitcoin price differences between exchanges varied as high as 4.5%,” said Danny Kim, head of growth at SFOX. Now price differences are no more than one tenth of one percent, according to SFOX.
That stability is crucial as if there’s less price fluctuation, then more merchants would feel comfortable about accepting bitcoin, which may lead to wider adoption.
A number of large Wall Street firms including Goldman Sachs and ICE, the parent company of the New York Stock Exchange, made headlines when they announced their intention to enter the market for digital assets. Behind the headlines, large money managers, hedge funds, and endowments have also been entering the market.
A recent report by Grayscale Investments, a subsidiary of Barry Silbert’s Digital Currency Group, showed a steady growth of net inflows into its funds during the first half of 2018. More than half of the inflows this year came from so-called institutional investors, according to Grayscale’s report.
Their entrance has been made possible by developments in trading technology that has allowed high-frequency trading firms (HFTs) and other market markers to double down on their crypto efforts, Kim said .
“Some HFT firms have been trading since crypto 2014, but have limited themselves because the infrastructure wasn’t there. Most if not all HFT firms require a FIX connection (an advanced type of connection to an exchange) at an exchange in order to trade efficiently,” Kim said. “Crypto exchanges haven’t offered FIX connectivity until recently.”
Equity exchanges, such as the New York Stock Exchange and Nasdaq, allow traders to house their trading computers in the same building as their matching engines. The service, known as colocation, is becoming more common in crypto. For instance, Gemini began offering colocation in 2017, followed by Coinbase this year. Those developments could help bring more price stability across markets for digital assets, Kim said.
“As this trend continues, the stabilizing effects of institutional investment will extend beyond price spreads, and on to price fluctuations,” Kim said. “Eventually, it could even come to the point where Bitcoin could come to resemble the stable coins people are looking to for payments and is used for Satoshi Nakamoto’s original vision: a “Peer-to-Peer Electronic Cash System.”
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