If you think Wall Street is just another investor in the cryptocurrency world, you are pretty much wrong. Wall Street might be plotting to kill the crypto market.
Crypto enthusiasts have been expecting for Wall Street investors to arrive for years. They thought that would bring new investments to raise the crypto market and help it gain even more momentum.
How naïve they were.
Firstly, Wall Street investors have enormous experience in various market conditions. They can easily override rookie crypto investors who have no financial background.
But the second and more important thing to know is that Wall Street is already neck-deep in the cryptocurrency market and it would be a mistake to think that Wall Street intends to do is pump the precarious market with its own capital.
Institutional finance has had many opportunities to make money in the cryptocurrency space.
But, as its influence spreads, the cryptocurrency market is transforming into something new.
Some experts think that Wall Street could slowly be killing cryptocurrency. Maybe it isn’t intentional, maybe it’s a byproduct of the flaws of the crypto market itself. Anyways, let’s see what is this theory is about.
How could Wall Street kill cryptocurrency?
There is a theory claiming that Wall Street can attack crypto with hypothecation.
In short, hypothecation is when a firm that owns equity shares in a company signs those shares away to a lender as collateral.
For example, suppose that Fund A needs $100 million. Broker B agrees to lend Fund A the money in exchange for $100 million worth of the securities that they (Fund A) owns.
This type of transaction is referred to as hypothecation. Rehypothecation occurs when Broker B reuses the assets they got from Fund A as collateral for its own business operations. In the traditional financial world, this is easy to do for a few reasons.
The first is that shares are not settled physically. Rather, they are written as certificates of ownership. This makes it easy to pass them along as an ‘IOU.’ Another reason is that accounting and tax laws allow the same asset to be attributed to different parties (as long each party records a different amount of debt on their balance sheets). Though counter-party risk increases significantly with a system like this, it’s necessary to grant increased flexibility to banks and brokers.
How can hypothecation influence cryptocurrency
It is easy to deem that major cryptocurrencies claim to rely on a proof-of-work (PoW) or proof-of-stake (PoS) system. So there is a fine protection from any kind of financial attack.
While that is true, there is still one factor you should be considering.
Most cryptocurrencies are actually traded on centralized exchanges.
If a Bitcoin were to be rehypothecated six times as brokers and exchanges trade debt and collateral, who gets to claim custodianship in the event that it’s needed?
Who actually owns the cryptocurrency at the end of the day if multiple parties know the private key?
There is a certain mantra that cryptocurrency enthusiasts live by: “Not your key, not your crypto.”
Let’s take a look at a hypothetical situation where a broker goes bust and someone needs to pay up, or if a hard fork occurs and someone needs to vote with their stake.
It’s unclear who actually owns the Bitcoin because, at this point, the collateral chain is so long.
This complex model of transient ownership simply doesn’t work when it comes to ledger-based assets. Just because it may result in multiple parties expecting remuneration at the same time. The chance of a meltdown in this scenario could be devastating.
How Wall Street is influencing crypto stability right now?
There were times when cryptocurrencies were traded exclusively on fiat exchanges.
This meant that users could only buy or sell. There was no way to short crypto and there were no futures or derivatives based on the cryptocurrency.
All purchases were settled in Bitcoin, for example. So anyone who bought a coin effectively removed it from the market.
You see, this is the exact reason why Bitcoin kept rising over the years. Bitcoin’s limited supply and deflationary nature made it easy for the price to rise exponentially. More people bought and fewer people sold because they expected greater returns the longer they held on to the currency.
Those are the pillars of the HODL philosophy. HODL is a famous misprint in the word ‘hold’ that has become a meme.
So Bitcoin was a subject to volatility just because the market experienced direct influence of the forces of supply and demand. Mass fear of missing out could send Bitcoin’s price soaring, while the same fear could bring it back down just as quickly.
Wall Street’s introduction of crypto futures to its own brokers and exchanges significantly reduced volatility, simply because futures allow people to speculate on cryptocurrencies’ downside as well as its upside.
How did financial traders invade the crypto market?
Well, through the ETFs.
A crypto ETF represents the real pipedream for crypto enthusiasts for two major reasons: first, ETFs are an underlying asset; and second, they’re part of the traditional financial market via brokers. With an ETF, cryptocurrencies would become more accessible to retail investors who still don’t have the patience or wherewithal to buy Bitcoin or other cryptos on cryptocurrency exchanges or operate a blockchain wallet.
Simply put, ETF the secret ingredient for mass adoption.
Those bullish on a Bitcoin ETF saw a glimmer of hope in October 2021 when trading began on the NYSE of the ProShares Bitcoin Strategy ETF (BITO). This ETF isn’t directly tied to bitcoin and instead tracks Chicago Mercantile Exchange (CME) bitcoin futures—the contracts that speculate on the future price of bitcoin.
On the other hand, ETFs that are directly tied to Bitcoin from several firms have been flat-out denied. That includes, for example, early bitcoin investors Cameron Winklevoss and Tyler Winklevoss.
Even though there are avenues for profit in crypto, and the field has enjoyed an increase in popularity in recent years, the future of cryptocurrency’s relationship to Wall Street and the greater investing public contains many uncertainties.