Bitcoin Foundation
Tuesday, March 26, 2013
http://www.financialsense.com/contributors/jon-matonis/is-institutional-money-coming-into-bitcoin
This month saw two important developments on the road to a mature and robust bitcoin economy.
First, there was the joint CoinLab and Mt. Gox announcement involving Silicon Valley Bank that I wrote about here. While the North American accounts represent a huge amount of trading volume and a large percentage of Mt. Gox’s book, the more interesting aspect was CoinLab’s intention to provide investment channels for long-term bitcoin investors similar to the various gold and silver investment vehicles. Bitcoin is increasingly becoming a favorable asset class and structuring vehicles for institutional participation is a good thing, because it broadens bitcoin’s base and expands the network effect.
Also, on March 8th, the first bitcoin hedge fund formally launched, administered by Exante, Ltd. headquartered in Malta. With 80,000 BTC currently under management, their fund holds control to approximately .73% of all bitcoin in existence today. The fund has a sophisticated security strategy and the threat model addresses most of an institution’s concerns including data loss risk, hardware failure risk, jurisdictional risk, external hacker risk, dishonest employee risk, and employee death or disability risk. Using Shamir’s Secret Sharing algorithm, the container password is then split into three parts utilizing a 2-of-3 secret sharing model spread across multiple jurisdictions.
Individuals may ask why they need a professional fund with fees to manage what they can do on their own for free. And while this may be correct for knowledgeable and careful individuals, it is negligent for a company or an institution. Any institution investing on behalf of its customers has a fiduciary duty to protect those assets from theft, data loss, and jurisdictional risk. Additionally, a succession plan must be in place that anticipates reliance on multiple parties and the distribution of that reliance.
I would even say that it is negligent also for individuals not to have a shared secret and backup plan, because being a single-owner BTC holder is akin to burying gold bullion in the wilderness and not telling anyone. It may even be worse than that because someone from the future would at least have the random hope of finding the gold.
Professional funds for bitcoin investment can also provide an element of active management which would include the responsible use of leverage and risk control strategies that lock in gains through the use of proprietary derivatives and market timing. Also, the launch of a registered bitcoin ETF (Exchange-Traded Fund) in the United States is not that unrealistic.
These early stages of bitcoin in the ‘store of value’ role are precursors to a more advanced futures and options market. As more and more merchants decide to maintain and spend bitcoin balances rather than instantaneously converting out into national currencies, the derivatives and risk management tools will play a vital role. Just as commercial gold mining companies hedge their future production to protect against volatile price declines, bitcoin operators will be able to hedge bitcoins on their balance sheet without liquidating the underlying asset.
If bitcoin is digital gold, then gold is analog bitcoin. This is not just Wall Street titans getting involved and ruining Bitcoin as some have claimed. It is a necessary prerequisite for Bitcoin’s evolving role in global trade.
First, there was the joint CoinLab and Mt. Gox announcement involving Silicon Valley Bank that I wrote about here. While the North American accounts represent a huge amount of trading volume and a large percentage of Mt. Gox’s book, the more interesting aspect was CoinLab’s intention to provide investment channels for long-term bitcoin investors similar to the various gold and silver investment vehicles. Bitcoin is increasingly becoming a favorable asset class and structuring vehicles for institutional participation is a good thing, because it broadens bitcoin’s base and expands the network effect.
Also, on March 8th, the first bitcoin hedge fund formally launched, administered by Exante, Ltd. headquartered in Malta. With 80,000 BTC currently under management, their fund holds control to approximately .73% of all bitcoin in existence today. The fund has a sophisticated security strategy and the threat model addresses most of an institution’s concerns including data loss risk, hardware failure risk, jurisdictional risk, external hacker risk, dishonest employee risk, and employee death or disability risk. Using Shamir’s Secret Sharing algorithm, the container password is then split into three parts utilizing a 2-of-3 secret sharing model spread across multiple jurisdictions.
Individuals may ask why they need a professional fund with fees to manage what they can do on their own for free. And while this may be correct for knowledgeable and careful individuals, it is negligent for a company or an institution. Any institution investing on behalf of its customers has a fiduciary duty to protect those assets from theft, data loss, and jurisdictional risk. Additionally, a succession plan must be in place that anticipates reliance on multiple parties and the distribution of that reliance.
I would even say that it is negligent also for individuals not to have a shared secret and backup plan, because being a single-owner BTC holder is akin to burying gold bullion in the wilderness and not telling anyone. It may even be worse than that because someone from the future would at least have the random hope of finding the gold.
Professional funds for bitcoin investment can also provide an element of active management which would include the responsible use of leverage and risk control strategies that lock in gains through the use of proprietary derivatives and market timing. Also, the launch of a registered bitcoin ETF (Exchange-Traded Fund) in the United States is not that unrealistic.
These early stages of bitcoin in the ‘store of value’ role are precursors to a more advanced futures and options market. As more and more merchants decide to maintain and spend bitcoin balances rather than instantaneously converting out into national currencies, the derivatives and risk management tools will play a vital role. Just as commercial gold mining companies hedge their future production to protect against volatile price declines, bitcoin operators will be able to hedge bitcoins on their balance sheet without liquidating the underlying asset.
If bitcoin is digital gold, then gold is analog bitcoin. This is not just Wall Street titans getting involved and ruining Bitcoin as some have claimed. It is a necessary prerequisite for Bitcoin’s evolving role in global trade.
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