The approval of the spot Bitcoin exchange-traded funds (ETFs) in the United States has slashed the barrier to traditional investors taking a position in the crypto market. The securitized form of Bitcoin opens up the crypto markets to a broad range of retail as well as institutional inventors. Bitcoin even attracted the limelight at the recent Davos 2024 summit as many traditional finance leaders could not avoid the digital asset anymore.
“This is truly a watershed moment,” said Michael Higgins, the Global Head of Business Development at Hidden Road. “It’s important to remember that the US market is a very equity-centric place. Derivatives are sideshow and very difficult to access.”
“Now, you will see much greater liquidity coming into the space. Greater product development, such as options and ADR, will come into the space. Ultimately, this is a really big positive as new entrances will come in, and so will these big flows. It will require the digital industry to have more accountability and open up more accessibility.”
The mainstream acceptance of crypto is not limited to the Wall Street. For several years, Bitcoin and other cryptocurrencies remained a hot topic of discussion at the Davos summits, which attracts the attendance of global business and political leaders. This year, the topics of discussion on crypto remained around the ETFs and also stablecoins.
Higgins also participated in a panel discussion at Davos 2024 that discussed on the impact of Bitcoin ETFs on global spot crypto markets.
Michael Higgins in a panel discussion at Davos 2024, Source: RULEMATCH
“You’re going to start seeing a slew of new strategies coming to the market on the back of this ETF,” Higgins told Finance Magnates. “It’s critically important that institutions have access to the two worlds of crypto and TradFi. The open question is, are they now the same? Because the CME market for Bitcoin has the largest open interest.”
📉 The open interest in #Bitcoin futures on CME declined by ~$1.5B following U.S. spot ETF launches.
This suggests a shift from futures to ETFs, as investors adjust strategies and hedge risks. pic.twitter.com/dSazOFzaJU
— Satoshi Club (@esatoshiclub) January 24, 2024
Bitcoin Is a Store of Value
Despite the promises, not all brokerages and financial services providers are comfortable with offering Bitcoin ETFs. Vanguard confirmed it will not provide its customers with any of the 11 approved Bitcoin ETFs. Several other major financial institutions also restricted access to such instruments to a limited number of clients.
“Bitcoin is a storage of value, something like gold,” said Higgins. “What’s interesting is Bitcoin is a non-carry instrument with no interest like gold. And so you don’t see gold in many of the large investment portfolios. The largest holders of gold happen to be central banks.”
“And so maybe the provocative question is: will we see central banks be the largest holders of Bitcoin?”
Donald Trump has said “As your president, I will never allow the creation of a Central Bank Digital Currency. Such a currency would give our federal government absolute control over your money.” … pic.twitter.com/x8NJlaew0F
— Bitcoin Scoop (@bitcoin_scoop) January 27, 2024
Higgins, who has a strong background working at forex brokerages, believes that crypto is similar to retail forex in the nascent stage as traders speculate on the prices of both instruments. However, retail forex has evolved over the years, and retail margin trading with currency pairs is heavily regulated globally.
“The traders of margin foreign exchange, CFDs of equity, indices, and commodities are natural users of Bitcoin,” said Higgins.
“Now, as the world shifts towards regulated requirements, cryptocurrencies will be transacted or brokered through the largely regulated broker-dealers. You’ll see even some of the digital exchanges becoming regulated globally.”
The Prime Brokerage Model
Hidden Road is a prime broker. The company already offers cryptocurrency liquidity through over-the-counter (OTC) prime brokerage. It additionally launched a comprehensive Synthetic Prime Brokerage solution for OTC Swaps, called Route 28, and partnered with Finery Markets recently to introduce an advanced OTC liquidity pool.
“We provide access to many things. But there are two main ones: access to all the liquidity trading destinations and access to financing,” Higgins highlighted. “It is the combination of those two access points that allow institutions to trade across the whole ecosystem in a capital and cost-efficient way.”
Funded in 2018, Hidden Road has cleared a few trillions of dollars in the prime brokerage business across forex and digital assets. The number of clients on the platform almost more than doubled last year.
According to Higgins, there has been a void in the prime brokerage business since 2008. Indeed, many banks have stopped offering such services to retail brokers and even exited the prime brokerage business.
“We are a sell-side business like a bank but operated with buy-side capital. We have stepped into a highly regulated environment. We run a highly regulated infrastructure to service that part of the ecosystem as well as even the largest names because the largest names don’t always get in single clear their business,” said Higgins.
The Impact of Brexit
Hidden Road has offices in the United Kingdom and the Netherlands, its continental European base. The company further witnessed the changes in the UK and European markets following Brexit firsthand.
“I think the UK and Europe are still navigating what that will look like right now,” Higgins added. “The UK is working very closely with the European Regulators. Their regulations are very similar. They haven’t diverted too much at this stage, but we’ll have to see how that can continue to play out; it’s certainly not as easy to leapfrog from the UK into Europe because they are now different regulators.”
“So I would say that the negative side is that it’s just become much more expensive for large brokered dealers to trade across it in the UK and outside of the UK in Europe. Generally, that’s a good thing because it only allows the safe, most well-capitalized entities to facilitate that. That’s a good thing to protect the end users and those investors, but for the broker-dealers themselves, it’s a lot more to navigate.”
