2020 is The Year Wall Street Could Take Over Cryptocurrency

Fresh off the German government’s decision to let banks store and sell cryptocurrency, Deutsche Bank predicted cryptocurrency will go mainstream by 2022 and eventually replace cash.

A cynic might call out DB for hyping crypto now, when they finally have a chance to make money off of it, and not sooner (when they couldn’t make money off of it).

Whatever. The result is the same: one of the world’s biggest banks endorsed cryptocurrency—and in a very big way.

Since the bitcoin crash of 2018, financial heavyweights Intercontinental Exchange (ICE), Fidelity, Chicago Mercantile Exchange, Chicago Board Options Exchange (CBOE), TD Ameritrade, NASDAQ, JP Morgan, Goldman Sachs, and State Street have put money into cryptocurrency-related ventures. Other may have, too.

Their activities range from custody, trading desks, financial services, derivatives platforms, and investment products. Some of them do this through subsidiaries and partners, others directly.

It took them a little while to solve the regulatory, legal, and operational problems that kept them out of the markets in 2017, but now that they’ve figured that out, expect them to make the most of the time and money they’ve invested.

For example, ICE plans to roll out a payment app, loyalty reward program, and merchant portal through its subsidiary, Bakkt. TD Ameritrade will offer bitcoin soon, likely through its own subsidiary, ErisX. Blockstack and YouNow completed the first-ever U.S.-approved Wall Street ICOs.

In 2018, Morgan Stanley released a client-only report explaining why bitcoin serves an important role in diversified investment portfolios. Yale researchers announced similar findings and Fidelity opened a digital assets custody service. ICE announced Bakkt, TD Ameritrade bought ErisX, and CBOE sponsored a bitcoin ETF application. Other entities made other plays.

More recently, a coalition of huge banks announced its intent to create a stablecoin for a blockchain-based global settlement platform and Ripple invested in MoneyGram, a money transfer company.

Grayscale Bitcoin Trust, the world’s oldest bitcoin fund, grew to $1 billion market cap and now ranks as one of the top 5 holdings for Millennial investors. Bitwise, Amun, and 3iQ created their own bitcoin funds while larger companies dabbled with derivatives and private trading desks.

In a recent survey, 76% of financial advisors reported receiving crypto questions from clients in 2019 and twice as many financial advisors expect to add bitcoin their clients’ portfolios this year compared to last.

On the heels of the U.S. government’s approval of Stone Ridge Trust’s NYDIG Bitcoin Strategy Fund, at least one analyst predicts a 60% chance regulators will approve a Bitcoin ETF in 2020.

The cryptocurrency industry is backing up that interest with real development. Microsoft is working on ID solutions using bitcoin’s blockchain. Deloitte is using STORJ for a secure email and file management service. VeChain wins new clients seemingly every day. Ripple continues to grow. IBM and JP Morgan now embed crypto in some of their business services. Factom won another U.S. government contract.

From what I can tell, it’s starting to sway the skeptics. After dumping on bitcoin for years, my wife’s cousin, a wealth manager, tells me he’ll buy some “when the price goes down.”

When the naysayers change their minds, you know the message has sunken in.

While companies like Coinbase and Binance seem HUGE to you, they barely register a blip on Wall Street’s radar screen. At valuations of $8 billion (Coinbase) and $2 billion (Binance), investment bank Morgan Stanley could buy both of them with three months of cash receipts—and still have money to spare.

Small players have dominated cryptocurrency since the beginning. In fact, they validated the business case.

(In other words, they showed the big guys that you can make a lot of money with cryptocurrency.)

Take BitOffer, a global trading service from Singapore. It offers options and passive investment funds for retail investors. It’s growing like crazy targeting young, savvy speculators with low-cost, low-minimum financial products, and plans to offer futures trading soon.

Or eToro, a trading app that lets you copy-trade and buy diversified crypto funds.

You think Bakkt hasn’t noticed?

New entrants continue popping up, threatening Wall Street’s opportunities with crypto. Levidge, the company that built the engine for Binance’s futures platform, upgraded that technology to create a stand-alone, crypto-only derivatives platform that also lets users post cryptocurrency as collateral for buying traditional assets.

Once Levidge opens, you can leverage your crypto for stocks, bonds, and “normal” investments instead of selling (and paying the associated taxes and fees). As your crypto keeps going up, you can use your gains to speculate on other assets, too.

On top of that, this platform will let users create their own funds for others to invest in, like a private portfolio manager would. 

Isn’t that the same thing Wall Street does?

With U.S. baby boomers expected to pass down $70 trillion to their Millennial children over the next few decades, Wall Street knows it can’t stay out of the cryptocurrency game.

If they wait, the “little guys” will steal their future profits.

In November 2019, Grayscale took the first steps to get U.S. regulatory approval to trade on U.S. exchanges. You can expect regulators will approve.

Once that happens, Grayscale will have the same type of legitimacy as mutual funds and ETFs. It will also have access to mainstream investors.

Keep in mind, Grayscale charges 2% in fees and trades at a premium that sometimes gets as high 20% (meaning, you might pay 20% more to buy shares in Grayscale instead of buying the same amount of bitcoin yourself, plus an extra 2% each year).

Do you think another Wall Street firm couldn’t offer a better, cheaper version?

If Bitwise and 3iQ can do it, surely the buy guys can, too.

Also, consider Lightning Labs, which just raised $10 million for a payment platform that will replace Visa (and all other payment processors). It will use the Lightning Network to settle massive numbers of transactions instantly for fractions of a penny.

Do you think Bakkt can’t use the Lightning Network to do the same thing?

Every Wall Street firm can do all these things—or buy somebody who’s already doing it.

But if they wait too long, these smaller players will corner the market before Wall Street has a chance to do so.

Wait, wait, wait.

Wasn’t cryptocurrency supposed to destroy banks and financial firms? Wasn’t that whole point of decentralized networks and distributed authority? Rule of code, not man? Not your keys, not your bitcoin? Self-sovereignty and all that?

Yes, that was the intent, but technology does not decide what happens to it. People do.

Wall Street sees an opportunity to make money off of crypto. Don’t you, too?

How is their greed any different than yours, Binance’s, or Bitwise’s?

If history’s any guide, Wall Street’s greed, er, “profit motive,” will lead to massive innovation and growth for cryptocurrencies—just like it did for mutual funds, ETFs, derivatives, retirement accounts, and online trading.

All these innovations led to more stable, robust financial markets.

Big money always moves niche technologies to the mainstream. For example, look at the internet after the U.S. government handed it to telecom companies.

It boomed.

But in the end, who won? Free internet died. Net neutrality died. Anonymity died. Privacy died. Those were core, fundamental reasons early internet users found the technology so compelling.

And yet, most people would say the internet made the world a better place. It spawned a new era in trade, communication, and economic development. In doing so, it created new industries and creative opportunities unimaginable even 30 years ago.

You’re reading this article because of the internet.

Cryptocurrency has the same transformative potential. How it evolves is as much a practical matter as a technical one. Wall Street will have a big say in that.

If you’re interested in more of my thoughts, read Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency. Over the coming months, I’ll occasionally publish on this topic as I have something interesting to say.

For now, expect more financial interests to sink their teeth into cryptocurrency. Governments will follow later, as always. The masses will be the last to realize what’s going on.

And we will all live with the consequences.

Hopefully, good ones.