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From Wall Street to Bitcoin

Adoption & community - From Wall Street to Bitcoin

Jonathan Silverman unveils the The Standard Bit – a Wall Street insider’s guide to Bitcoin and the emerging virtual currency space.

Here is Jonathan’s Story:

I first learned of Bitcoin in April 2011 – long before it was trading in the triple digits like it does today.I had just begun my career as a trader at one of New York’s prestigious bulge-bracket sell-side firms.There I had the best laboratory in the world to learn how to trade.Equities, currencies, bonds, commodities, futures, options – my mind was a blur that first year as I tried to take my scientifically-trained brain and forge it into one of a trader.One morning, after helping my team fend off an aggressive fast-money seller, I stumbled across a post on Tyler Cowen’s Marginal Revolution on Bitcoin – the virtual currency was entirely new to me.

There he questioned if Bitcoin was in a bubble after making new highs as it pushed toward the $2 boundary.Granted that was a 2000 appreciation from a year prior.2000 percent!I rubbed my eyes and checked my monitor once more.There the hockey-stick of a chart remained unyielding.A return of that size in the world of finance does not make sense.It is outrageous and absurd. It stinks of penny-stock or fraud or both. It screams to any sane investor that they should run in the other direction.Luckily I was not one of those.Trusting my gut – and in the process throwing out the window nearly every piece of investing advice I had ever learned – I bought.

Buying was not as simple a task as I had hoped.On the day I read Tyler’s post, the Bitcoin-US Dollar exchange rate (BTCUSD) closed at the price of $1.7949.Four weeks later, after jumping through half-a-dozen hoops to get cash onto Mt. Gox, Bitcoin’s oldest exchange, the price had more than tripled.I held my nose and bought in for an average price of $6.3308. During that waiting period I learned an invaluable lesson: the majority of speculators had recently discovered Bitcoin and were struggling to move deposits to purchase it.Each day I checked Google Trend data for Bitcoin related search terms and saw the network effect of an infectious idea at work. In a scarce liquidity environment, media attention pushed price and the price in turn drew new eyes to this grand experiment.A week later my roommate at the time – then a trader at another bulge-bracket firm – joined the fray.$8.$10.$15.We were flabbergasted by our good fortune.Convinced we had boarded a rocketship of a bubble, we settled on an exit strategy.

On Friday July 8th, 2011 the market looked grossly overheated as it broke $30 and liquidity had become dangerously one-sided. My roommate called this the top.I on the other hand had let my emotions get the best of me.I was leaving that afternoon for a four-day vacation where I would not have access to the internet or my cell phone.When I returned to land of the internet that next Wednesday, I coolly checked the level of BTCUSD.$21.Not awful.Taking a closer look at the chart, I saw that heavy selling over the weekend had knocked the price down to $10.25.I know a dead cat bounce when I see one.I hit every bid I could find to close out my position and I was gone.

In the aftermath of the bubble of 2011, I resolved to steady my thinking on this newfangled currency.Whether or not Bitcoin would survive, I could not tell, but Satoshi Nakamoto had opened Pandora’s box.There was no putting it back.

Virtual currencies have tremendous potential to reshape our world’s political and economic landscape. To Bitcoin’s naysayers I urge them to take a look at the lessons we can draw from this innovative new stuff.The technology behind the Bitcoin protocol alone could dramatically transform clearing and settlement processes for established financial products.There is much work to be done and the financial community is just beginning to take notice. So too are the regulators.Regulation of virtual currencies in the United States is well underway with FinCEN giving its first guidance on the subject in March of this year.Even under this purview there is room for Bitcoin to survive and thrive. In the long run I welcome this oversight.With the support of venture capital funding, the second generation of Bitcoin start ups are putting down roots.More importantly it appears that many of them will be compliant with US regulation and law by FinCEN’s deadline in mid-September.Wall Street would be wise to pay attention.

In the coming weeks I will be writing about Bitcoin and the broader virtual currency space with the established financial community in mind.Topics will include:

  • trading strategy and best execution
  • market structure and exchange topology
  • asset management and portfolio diversification
  • the state of regulation within the United States and abroad
  • new technologies in clearing, settlement, and custodial services

If you have any suggestions or requests, I am all ears.Please drop me a line. In addition to writing, I provide consulting services on the topics listed above.If you think I can help advance your virtual currency related project or investment goals, I would be more than happy to chat with you.I look forward to your readership and the great discussions it will drive.

Happy Trading,

Jonathan Silverman