Jack Liu

2014 was supposed to be the Year of Wall Street

It was supposed to be the cypherpunks, followed by the anarcho-capitalists, then onto the VCs, and this year, Wall Street and Institutional Investors.

2014 hasn’t quite played out that way. 

As such, I took a trip to my old stomping grounds to try and figure out why Wall Street has been quieter than many expected at the beginning of the year.

The good news is I feel a lot more informed after visiting with former colleagues at bulge bracket investment banks, former clients of mine at some of the world’s largest Hedge Funds, Pension Funds, and Private Equity funds, and I had a chance to speak with a couple Family Offices as well.

The bad news is I don’t think Wall Street money is really the next phase for Bitcoin. 

I preface the below by noting that I only spoke with a couple dozen people and therefore would not deem any of my observations as absolute. 

An Opening Surprise

Back in my old grounds, I was shocked that the immediate reaction I received was to the tune of ‘What? You are involved in Bitcoin now? I didn’t know it was that bad. Let me try to find you a job in Q1 2015’. Practically speaking, I didn’t rule out warming to that possibility but nonetheless I was quite surprised at their first reaction. A junior guy that I had mentored in the past who just started trading Gov Bonds even said to me 'Dude. Stop chasing bubbles. Find a real job. I can send you some stories of Beanie Baby traders if you need a reality check’. Rough. 

Truth is I wasn’t so concerned by these folks nor others who thought Bitcoin was a bubble or had only heard of Silk Road and Mt Gox. I wanted to speak to people that knew Bitcoin decently well and get their reasoning for why Wall Street had not gotten in. Fortunately, I found a few. 

The people I spoke to were Portfolio Managers, Traders and Salespeople dealing across Private Co’s, Commodities, Equities, and FX.

I was reminded very quickly by these folks that asking Wall Street to 'adopt’ Bitcoin in the form of buying the coins themselves was just incredibly foreign to the way they operated. At the same time, most Bitcoin startups haven’t even made it to Series B and so investing in the companies also didn’t seem appropriate. 

The way Wall Street operates

The motto for Wall Street has always been to find an edge - an arbitrage model, a high frequency algo, a long/short pair trade, credit vs. equity, offsetting risk to retail investors, fundamental analysis, event-driven plays etc - and then to lever up and trade on that edge. Rinse and repeat. 

What’s wrong with buying Bitcoins for Wall Street 

Everything they knew and everything I was able to explain about Bitcoin didn’t fit that mode of operations at all. The proposition sounded like Wall Street was supposed to buy coins next because they were sophisticated enough to understand Bitcoin and its potential and had the capital at hand to speculate on it. 

…And they were supposed to do that with 100% cash on no leverage, and then just park the bitcoins and bank on the next wave of adoption and investors to come. There’s really no trading out of a position as the reality is on some days, exchange volumes for BTC are only a couple million USD.

That unfortunately is not appealing and not feasible for the Wall Street guys I talked to. Nowhere in that picture does it give them something to do everyday, and it was too capital intensive given the lack of access to leverage and arbitrage opportunities. There was no easy way to price it using their traditional methods. There’s a common phrase termed 'career-risk’ that goes around Wall Street - meaning if you’re not long the S&P500 - you might be out of a job. However, there just is no 'career risk’ for not getting into Bitcoin in 2014. It’s quite the opposite. One guy at one of the world’s largest pension funds said to me 'I don’t think it’s at a point where I can have that conversation with the Board’.  

When will 'Wall Street’ show up? 

The high-frequency guys are actually excited to trade Bitcoin when the market cap is significant enough that market making on the exchanges using algos can generate a few million dollars in profits. Private bankers are interested in issuing retail notes when there is demand. The ETF guys are excited about arbitraging the NAV premium on COIN between the ETF shares and the physical coins.

In essence, Wall Street will be there when Bitcoin is big enough for them to take their cut or 'edge’ on the daily trading volumes. They will be there to provide liquidity and offer various investment vehicles. They are not going to be a pawn in the Bitcoin enthusiasts’ plan - as a source of significant speculative capital to pump Bitcoin up another 10x. 

What does that mean for Bitcoin?

Perhaps caught in all the speculative enthusiasm of 2013, we as a community looked in the wrong direction for the drivers of the next wave. We were looking for the next group of people - 'Wall Street ’- to step in and continue speculating. There is no doubt that multi-sig and various security advancements have been significant and have set up the infrastructure in place for exchanges, broker-dealers, investment firms to hold and trade in Bitcoin. While these are necessary requirements for institutional investors, taken in isolation, they are not drivers of fresh buying. 

What we should have been looking for and what we need to look for now are fundamental use cases for Bitcoin. Speculative capital can come and go. The people that need to use Bitcoin for their online gambling, their remittances, their adult content, their micropayments, etc - these are the people that will stay and uphold the fundamentals of the currency.

If we shift our focus from finding the next group of speculators to finding the next killer use case, the future will undoubtedly be bright for Bitcoin. And after a few waves higher for the market cap, who knows, we just might find Wall Street all around. 

 



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