In the latest episode of Epicenter Bitcoin, Brian Fabian Crain and Sebastien Couture were joined by Daniel Gallancy, CEO and Founder of SolidX Partners Inc. With his company that recently raised a US$3 million funding round from Liberty City Ventures and Wall Street investors, he aims to make Bitcoin accessible to financial investors that have so far been excluded from the Bitcoin market.
At the beginning of the year, there were plenty of predictions that financial institutions would start moving into the Bitcoin space. The Bitcoin ETF was on the horizon and the high-risk, high-reward nature of Bitcoin seemed perfectly suited for the institutions, such as hedge funds, that are aggressively pursuing the biggest returns.
This hasn't quite happened yet, and Gallancy provided a picture of why that has been the case.
"Financial institutions have complicated ordering, auditing and compliance processes and Bitcoin simply doesn't fit in there," he said. In addition, while plentiful news coverage has made sure that by now most people have heard of Bitcoin, few have taken the time necessary to really understand how it works and what its potential is.
Providing Access with Total Return Swaps
SolidX has found an innovative yet simple way of working around some of those hurdles, to provide an uncomplicated way for hedge funds and other institutional investors to take Bitcoin positions.
Here is how this works: A hedge fund wants to take a US$5 million position in Bitcoin. SolidX then purchases US$5 million worth of bitcoins (minus a fee), and after a year (the duration of the swap), SolidX sells those bitcoins, and the hedge fund receives the dollar value of the bitcoins at the time.
Economically, this is practically equivalent to purchasing US$5 million of bitcoin outright, but the investor doesn't have to worry about security, compliance or legal complications.
“We put bitcoin on the menu for financial institutions.”
The vehicle is called a “total return swap”—a known vehicle that is commonly used to give investors access to difficult-to-purchase assets. A frequent usage is to give US-based institutions a way to get exposure to stocks in countries with capital controls or other restrictions that prevent them from purchasing the stock directly.
Bitcoin: An Upcoming Asset Class?
Much of the rest of the episode revolved around the economics of Bitcoin and how they might play out in the future. Some of the key questions were: Will Bitcoin become an asset class in its own right? Will financial advisors recommend one day that people hold some bitcoin as part of a balanced portfolio along with stocks, bonds, real estate and gold?
Gallancy believes this is indeed possible, but much will depend on how the Bitcoin ecosystem develops. Will there be more users, more wallets, more transactions, more liquidity?
A question that ties into how investors look at Bitcoin was related to how they model and generate price targets internally. Bitcoin doesn't clearly fit into existing categories and that makes this a significant challenge. Discounted cash flow models commonly used for stocks don't apply, because return can only come from appreciating prices. The commodity pricing models that might be a better fit rely on modeling supply and demand curves, and while the supply curve of Bitcoin is a given, figuring out the demand is anyone's guess.
What is certain is that interest in Bitcoin (the technology) and bitcoin (the currency) is increasing. We have a rapidly developing set of tools allowing companies to handle bitcoins directly, and companies like SolidX provide essential bridge solutions for the meantime. Whether we will see financial institutions embrace bitcoin as a new asset class remains to be seen, but if it does happen, it could have a huge impact on Bitcoin’s development in the next few years.
About Epicenter Bitcoin
Epicenter Bitcoin is a show about the technologies, projects and startups driving decentralization and the global cryptocurrency revolution. Every week, hosts Brian Fabian Crain and Sebastien Couture talk to some of the most influential people in the cryptocurrency space about their projects, and get their perspectives on recent events.
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