The Wall Street Takeover of Crypto
From ETFs to Centralized Exchanges, Major Wall Street Players like BlackRock, Deutsche, Fidelity, Franklin Templeton, and others are Making Their Mark on the Cryptocurrency Landscape
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In the past, the cryptocurrency market was an exclusive domain of tech enthusiasts and retail investors. However, recently the market is witnessing an unprecedented influx of Wall Street giants.
Why is Wall Street entering the market?
There are multiple reasons.
Cryptocurrencies are increasingly recognized as a legitimate asset class with the potential for high returns
The decentralized nature of cryptocurrencies offers a hedge against traditional financial systems
The rise of blockchain technology: the underlying infrastructure of cryptocurrencies (smart contracts and DeFi), has opened up new avenues for innovation in financial services.
Rise in demand from clients - both retail and institutional
Societal trends: The digitalization of the economy, the rise of the sharing economy, and the growing importance of data and digital identity
development of regulatory frameworks around the world (except the US)
So what are these Wall Street Institutions attempting to accomplish?
There are two main area’s Wall Street wants to capture: ETF’s and Exchanges.
And here are some of the names looking to capitalize:
BlackRock
Citadel
Fidelity
Charles Schwab
WisdomTree
Invesco
Spot ETFs - A rocky road
A Bitcoin Spot ETF (Exchange Traded Fund) has long been seen as a significant milestone for the crypto industry. An ETF would allow investors to gain exposure to Bitcoin without the complexities of owning the digital asset directly. However, the journey towards a Bitcoin ETF has been fraught with challenges.
The U.S. SEC notably has rejected every application for a Bitcoin spot ETF.
The reasons cited by the SEC revolve around concerns about the lack of transparency, the potential for market manipulation, and liquidity issues in the crypto market.
However, while they have declined Spot ETF applications, they have accepted applications for futures-based Bitcoin ETFs with GBTC, BITO, BITX, and others.
Wall Street's Recent Bitcoin Spot ETF Applications
Despite these setbacks in the past, several Wall Street firms have recently filed applications for Bitcoin ETFs. Suggesting that Wall Street is optimistic about the prospects of a Bitcoin ETF.
On June 15, BlackRock, the world's largest asset manager, applied for a Bitcoin spot ETF. This move by BlackRock, which manages over $9 trillion in assets, is a significant endorsement of Bitcoin's potential as an investable asset. BlackRock’s ETF Approval record of 575-1, so many believe they must know the chances of the SEC accepting their application are high.
On top of that, since June 15 many other firms have applied as well. For instance, WisdomTree, a New York-based asset manager with a Bitcoin ETF already operating in Switzerland, filed a new application (on June 20) with the SEC after its initial application was rejected in March 2021.
Invesco and Galaxy Digital have also applied for a physically-backed Bitcoin ETF. In the filing, Invesco argues that the lack of a spot Bitcoin ETF “exposes U.S. investor assets to significant risk” as they “are forced to find alternative exposure through generally riskier means.”
EDX: The Centralized Exchange Created by Wall Street
Along with new ETF filings, a new player has emerged in the crypto exchange landscape. EDX Markets, backed by Wall Street institutions like Citadel Securities, Fidelity Investments, and Charles Schwab. Three large players in Traditional Finance.
EDX's approach to crypto trading is unique. It aims to incorporate best practices from traditional finance and offer unique advantages, including liquidity, competitive quotes, and a non-custodial model designed to minimize conflicts of interest and avoid entanglements with the SEC. This model means that EDX does not directly handle its customers' digital assets. Instead, it operates a marketplace where firms agree to execute trades of coins and dollars, using its platform to agree on prices.
EDX currently supports the trading of only four cryptocurrencies: Bitcoin, Ether, Litecoin, and Bitcoin Cash.
EDX's approach draws on standard practices in traditional, regulated financial markets. Later this year, EDX also plans to launching EDX Clearing, a clearinghouse aimed at settling trades executed on the EDX Markets platform.
The Impact of Wall Street on the Crypto Market
The entry of Wall Street into the crypto market could have significant implications for Bitcoin and Crypto in general.
High Level Impacts:
Legitimization of Cryptocurrency: ETFs are a traditional and widely accepted investment tool.
Increased Accessibility: ETFs are typically easy to buy and sell, and are accessible to retail investors. A Bitcoin ETF would allow more people to invest in Bitcoin without having to manage a digital wallet or deal with the complexities of directly owning cryptocurrency.
Regulatory Clarity: The approval of a Bitcoin ETF by regulatory authorities would represent a significant step towards regulatory clarity for Bitcoin and other cryptocurrencies.
Institutional Adoption: The involvement of major financial institutions like BlackRock in cryptocurrency ETFs could also encourage other institutions to consider cryptocurrencies as an asset class.
Potential for Growth: An ETF provides an easier way for investors to gain exposure to Bitcoin’s potential growth, which could lead to increased demand for Bitcoin and other cryptocurrencies.
Risk Diversification: For investors looking to diversify their portfolio, a Bitcoin ETF can provide a way to invest in digital assets without the need to understand and manage the technical aspects of cryptocurrency.
It’s important to note Institutional Investors control the far majority of the capital in public & private markets. And with these institutions now have a way to buy spot Bitcoin, there will be an influx of money entering the Bitcoin, which will send the price of BTC up. Also the perception of cryptocurrencies as a risky, fringe investment could change.
Since the announcement of BlackRock filing a Spot BTC ETF, we have already witnessed capital entering the market with Bitcoin rising 22% since June 15 as many Institutional Investors (such as Hedge Funds) in the US are front-running the buying power that is bound to come if and when one is accepted.
Another impact of Institutional adoption of Bitcoin will be the increase in volume and liquidity. Throughout the past few months, we have seen a decrease in BTC volume due to Market Makers (such as Jane Street and Jump) leaving the space.
On top of that Bitcoin will become a part of more individual investor portfolios as well. ETFs are a common way for individuals to invest their money over the long term and in retirement accounts, with many investors holding ETFs like the SPY, VTI, QQQ, GLD, and many others.
Given the rise in popularity over the past 5 years, many people will allocate a portion of their portfolio to a Bitcoin Spot ETF, especially if it comes from a trusted Wall Street name.
Going against the original Bitcoin Ethos
However, Wall Street entering the Crypto Market is not entirely positive. One negative is that it goes against the ethos of many in the Bitcoin and Crypto ecosystem.
First of all, owning Bitcoin through a Spot ETF does not give you custody of the Bitcoin you hold. Making it so you purely own a share of a Trust that holds the equivalent amount of Bitcoin.
Also, the SEC seems to be paving the way for Wall Street to enter the market by removing the companies responsible for making the industry what it is today. This may be why they went after the two largest exchanges earlier this month with their lawsuits against Binance and Coinbase.
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