The institutionalization of cryptocurrency took another big step forward as trading giant TD Ameritrade joins over 10 partners such as Cboe Global Markets and Virtu Financial, Inc in an invenstment in cryptocurrency exchange ErisX. TD Ameritrade can already trade CBOE Bitcoin futures, but now they will be able to trade coins like Ethereum and Litecoin and their derivatives. In 2019, spot trading will come first with physically settled futures coming second. This new iteration of ErisX has a lot of similarities to the NYSE/Starbucks venture Bakkt in that they will be bringing professional trading, data, and clearinghouse services to the crypto space, backed by physical custody of the underlying assets.
“Leveraging our heritage and experience with exchange infrastructure, our market participants will benefit from modern trading tools on a fair and transparent platform. ErisX’s enhanced experience will provide the opportunity for new participants to enter the digital asset market and existing participants a superior venue for their execution and clearing needs.” – ErisX CEO Thomas Chippas, formerly at Citi
The recent round of Bitcoin ETF denials and delays seemed to effect sentiment, but they are understandable due to the idea that the underlying have too much manipulation and not enough liquidity to support serious investments. What liquidity there is can sometimes be over leveraged, which should not be an issue for ErisX as they will be buying and maintaining custody of crypto assets and will require trades to be fully funded.
Custody is always going to be a major issue with crypto. Security is only going to be more important over the coming years in general as more and more people try to exploit holes in every layer. Your coins themselves are quite secure on the blockchain, but the process of accessing them leaves you vulnerable to a lot of bad actors. Safe, regulated, and insured custody is badly needed in this industry before we see some of the bigger players step in. Risk always needs to be assessed and managed, custody or transfer loss is not acceptable.
With the private keys safely in cold storage the exchange can start to offer products such as physically settled futures, also fully funded meaning at a predictable rate and time a trader will receive the underlying asset, not settling in cash or BTC like exchanges such as Bitfinex, Bitmex, CME and CBOE do. This should be good for the market and overall prices as demand could start to outpace supply. Don’t ever forget that there will only ever be up to 21 million Bitcoins, and an estimated 5 million have already been lost.
A derivative clearing organization (DCO) will provide liquidity and assurance which retail investors may not think about, but professional traders require. Most centralized crypto exchanges relay on users to populate the order book to some degree (although there are usually market makers). Accusations of fake volume, wash trading, and outright fraud are prevalent in the crypto markets, accredited investors can’t participate in this kind of activity. Off shore exchanges often operate in a kind of no mans land in between jurisdictions. Your funds may not be safe, and neither is your identity. The crypto clearing house will eliminate a lot of these problems by making sure every trade is executed correctly and on time.
This news has not directly affected the overall prices yet but once these large-scale ventures like Bakkt and ErisX get up and running the entire market should start to feel the effects. Institutional money is still largely sidelined right now as we wait for the SEC to clear up some of the regulatory questions. The CFTC recently declared that Bitcoin is a commodity so that may also get things moving in the right direction to bring this huge new market into crypto next year.