The Wall Street Myth

[oda.krell]

The motto for Wall Street has always been to find an edge - an arbitrage model, a high frequency algo, a long/short pair trade, credit vs. equity, offsetting risk to retail investors, fundamental analysis, event-driven plays etc - and then to lever up and trade on that edge. Rinse and repeat.

Everything they knew and everything I was able to explain about Bitcoin didn’t fit that mode of operations at all. The proposition sounded like Wall Street was supposed to buy coins next because they were sophisticated enough to understand Bitcoin and its potential and had the capital at hand to speculate on it.

…And they were supposed to do that with 100% cash on no leverage, and then just park the bitcoins and bank on the next wave of adoption and investors to come.

In essence, Wall Street will be there when Bitcoin is big enough for them to take their cut or ‘edge’ on the daily trading volumes. They will be there to provide liquidity and offer various investment vehicles. They are not going to be a pawn in the Bitcoin enthusiasts’ plan - as a source of significant speculative capital to pump Bitcoin up another 10x.

from: http://jackcliu.com/post/97546140332/why-wall-street-has-yet-to-enter-bitcoin


There's this persistent idea that "Wall Street" is going to "drive the next bubble". Alternatively that idea is expressed as "once big money arrives" (we're going to the moon).

Just finished reading this post by Jack C. Liu, and I wanted to share it here because it puts into not-too-many words what I've been thinking myself for a long time now: don't count on Wall Street to drive the next price jump.

I'm sure you will (correctly) point out that this Liu guy is just another dude with an opinion. Absolutely true. I'm not claiming this post is interesting because of deep insider knowledge. It is interesting in my opinion because it makes sense.

Let me know what you think.

[1715644684]

1715644684

[sgbett]

When I see 'wall st' in the context of 'is driving the next bubble', I don't think of wall st trading outfits I think of it more like its the ability for mom and pop investors to get into bitcoin via 'wall st' e.g. ETF.

Then, by default wall st starts making money, as they always have done, by front-running, skimming fees, margin calls etc etc

So I agree that wall st in the classical sense won't be buying and holding.

[oda.krell]

When I see 'wall st' in the context of 'is driving the next bubble', I don't think of wall st trading outfits I think of it more like its the ability for mom and pop investors to get into bitcoin via 'wall st' e.g. ETF.

Then, by default wall st starts making money, as they always have done, by front-running, skimming fees, margin calls etc etc

So I agree that wall st in the classical sense won't be buying and holding.

Right. The point of Liu's post is that Wall Street firms themselves, with their own money, will probably never be the "next group of investors", and will most likely only get in once volume allows them to do their usual tricks.

About the point you make: It's alluded to in the part I quoted actually, as "offsetting risk to retail investors".

But that's another question: how likely is it that a massive vehicle for retail investors (like the ETF, or the existing funds) is going to pump up price all by itself, especially in a persistent bear(ish) market?

In my opinion, it's going to matter eventually (as a huge "fiat flood gate" for the next price jump). But the timing of that next price jump could be much farther into the future than most in this forum seem to believe.

[phoenix1]

I agree with the general description of pairs trading, statistical arb etc, with max leverage applied, being the way a lot of banks make their money on the proprietary side. It looks relatively risk free on the balance sheet and is not capital intensive.

There are however also guys 'swinging the bat' with big, directional , swing trades. BUT again, they use leverage ...

So yes, I agree that buy and hold from the street is unlikely. Hedge funds mostly operate on the same principle. Leverage, leverage, leverage.

On the retail side, it's about what products can be packaged and sold to investors, often in an attempts to reduce the risk they have taken by committing capital to hedge funds to 'service' them. So they try and palm off the other side of the hedge fund trade on Joe public lol

So until there is actual retail demand for BTC products that they can take a cut on (like an ETF), no, other than very specialised hedge funds, I don't see much raw demand from the banks themselves. Never did.
The public need to be demanding exposure to an underlying, or a bank need a sucker to offset their own existing risk in order for them to get involved.

So it comes down to 'how much demand will their be  for an/the ETF ?' and as you say, in the current long term bear market, that is very much open to question, and I agree with your conclusion that it could take longer than expected.

[hf100]

In essence, Wall Street will be there when Bitcoin is big enough for them to take their cut or ‘edge’ on the daily trading volumes. They will be there to provide liquidity and offer various investment vehicles. They are not going to be a pawn in the Bitcoin enthusiasts’ plan - as a source of significant speculative capital to pump Bitcoin up another 10x.

I agree with this quote. Plenty of people here expect Wall St big city slickers to throw limitless money at bitcoin and then HODL. Wall St big city slickers don't operate like that.

[piramida]

In essence, Wall Street will be there when Bitcoin is big enough for them to take their cut or ‘edge’ on the daily trading volumes. They will be there to provide liquidity and offer various investment vehicles. They are not going to be a pawn in the Bitcoin enthusiasts’ plan - as a source of significant speculative capital to pump Bitcoin up another 10x.

I agree with this quote. Plenty of people here expect Wall St big city slickers to throw limitless money at bitcoin and then HODL. Wall St big city slickers don't operate like that.

Yes right that's why they never pumped google 10x from the IPO price. Of course it will be up-n-down just like it goes now, with pumps and dumps along the way - that won't change - what will change is the exposure to the world of limitless fiat, which is pretty thin now. Once you connect a limitless fiat pool with a limited bitcoin pool, closed feedback loop will quickly move the price to infinity.

[zimmah]

I think he has a valid point

ultimately it's their loss though

it's actually more risky to wait until bitcoin has already established itself, rather than taking a certain profit now.

but that's not the way investors think.

[sgbett]

I think a nice summary is that investors buy and hold, speculators buy and sell - Wall St speculates!

piramida cuts to the crux:

... what will change is the exposure to the world of limitless fiat, which is pretty thin now. Once you connect a limitless fiat pool with a limited bitcoin pool, closed feedback loop will quickly move the price to infinity.

ETF legitimises btc as a currency/commodity to trade, as well as increasing liquidity. I think people that *have* bitcoin are already equipped with the means to sell. I think people that don't have bitcoin will benefit from this new vehicle for buying purposes. Which puts upwards pressure on the underlying.

The big question is how much, and in this regard the above quote makes me optimistic.

[spiderbrain]

I don't think there will be any serious buy and hold movement by big financial firms. But I do think it's likely some companies will dip their toe in, and in a $100 Trillon+ derivatives market, that may be a big toe. The global CDS market alone is worth $25 Trillion, and bitcoin has a major advantage over CDSs because it has no counterparty risk, so it has the potential to be very valuable during credit shocks. This is, a least, one of the main reasons why I am invested in bitcoin.

[Tzupy]

oda.krell getting weaned from another bitcoin myth, besides the ones in rpietila's quality delusional TA thread.

For Wall street fiat to pump the next mania phase of a bitcoin bubble, they'd have to be sure there are enough potential bagholders
to buy close to the top of the bubble. Which means lots of good press on bitcoin, to entice new suckers to buy at ~5,000$. Possible, but IMO not soon.

[spazzdla]

EXCEPT.. the fact ballers "wall street" might already be a 5,10,20,30% holder of BTC and would make a massive beating jacking the price up and selling it at 10,20,30x...

Soooo ya.... There are large chances this is what has happend.  They could keep the price suppressed for years.. even tanking it so low they could become massive holders and only the die hard BTCers and "wall street" would be left with any BTC then.. BAMZO create a small finacial criss.. jump the price of BTC 100%.. watch the public pump it to 20,30x and sell.

[Chuckee]

Not long ago, I was that Wall Street was still on their months long summer beach vacations with no Internet access and would not be back until September. And now I'm being told that there is no Wall Street money?? My world is collapsing.

[vuduchyld]

I think this is absolutely correct:

If we shift our focus from finding the next group of speculators to finding the next killer use case, the future will undoubtedly be bright for Bitcoin.

I've posted this a few different times in different threads, but I think it's interesting to speculate about the use case of buying gasoline at the pump.  There is massive potential upside to this case, as it is a very low margin item for c-store operators, and they are paying in the neighborhood of 4% on transaction fees.  Gas is something many people buy a lot of and buy frequently.  If the credit card processors could be cut out, there is almost 4% to spread between the c-store operators and the consumers. 

The downsides include: speed of confirmation with BTC, rules regarding taxation (would technically have to book the capital gain/loss at every transaction, I think), lack of infrastructure at the pump in terms of BTC-native solutions.  I mean, I could buy with CoinFueled or Qora right now, but that doesn't actually save the c-store operator the processing fee. 

Partial solution would include equipping pump with a BTC wallet or some other native BTC-enabled system.  Maybe one of Draper's VC army could get to work on building/selling a BTC-enabled gas pump to sell to c-store owners.  But is there enough consumer demand that 2% of all BTC-for-gas purchases would pay for that hardware? 

Bottom line, if I could buy gas with BTC, I would likely do it.  I would also immediately replenish my BTC supply, just about every time, with a little bit of possible price arbitrage.  If I thought I could buy cheaper before my next fill up, I might wait a few days.  Especially if I could get a discount on the gas, it would be worth it. 

But we're REALLY far away from this use case right now.  The only use case that works, so far, is buying something online (computers, travel) that may not ship for 24 hours. 

Note: there is nothing special about this use case, other than the fact that it represents something people commonly do, not online, and not mirroring the use cases that exist.  I just find it to be a good mental exercise that helps me understand how far away we are from BTC becoming used consistently and frequently as a currency.

[JimboToronto]

My world is collapsing.

Isn't your world always collapsing?

 

[cypherdoc]

all Liu is saying is that Wall St will resist any financial system that doesn't allow it to take a risk free chunk out in fees or market inefficiencies from the retail investor.  so what has changed?  there are Wall St individuals "swinging the bat" as stated above in the Bitcoin space.  that should only increase with time.  we're already seeing isolated banks round the world dipping their feet into the waters.  i think this trend continues until Wall St can't ignore it.

there does not need to be any rush.  eventually, it will happen.

[giveBTCpls]

If wall street comes, the sell side of the order book will dry up. Why? Because early adopters won't want them to take away our toys. And access to the block chain is guaranteed while we have an Internet.

That would, in turn, be the reason price goes bonkers.

In short, I think you're being pessimistic. Bitcoin can't be taken away. Either in terms of coins or infrastructure.

[phoenix1]

In short, I think you're being pessimistic. Bitcoin can't be taken away. Either in terms of coins or infrastructure.

I don't think Oda was disagreeing with that. Just more about whether they will be the drivers of the next price surge, and if so, when?
And as an extension, if not, then who?

As Cypherdoc says, the number getting involved will increase over time as there is profit to be made from retail customers, but a priori there needs to be that demand, and the liquidity for them to extract sufficient profit.
Retail wants it, retail will get it! Or, as liquidity increases such that it becomes more of a tradeable asset in in the order of magnitude that raises banks eyebrows and their bottom lines, they will get more involved.

It's a hard sell to a risk manager to take a decent enough outright position in something that cannot be easily liquidated and has regulatory uncertainty surrounding it. Its a ballsy call, when you can instead leverage up a relatively risk free pairs trade and not risk your job.
Until then IMO, most will sit back, watch and wait. And for sure they are watching. And they are more patient than most of us here. Different time frames, which also supports the idea that as 'big money' bets involved, the cycles may lengthen, in both time and amplitude.

Meanwhile I think HNWI's may be the next driver to take it to that level. They can afford to get involved and don't have shareholders to answer to. I think this is already happening to some degree. And many of them may be the very same traders from the banks, using their own money.

When the VC funded start ups reach IPO stage and banks can take a stake in them, they will have more of an incentive to prime the price of both.

Retail usually buys the tops after a cycle of self-interested hype 

[Wexlike]

I think wall street will drive the next rise. Although i really liked his blogpost - a lot of good points. But i see it from a different angle. In my opinion bitcoin is really cheap right now. Vendor and mining infrastructure is rising every day, but the price does not reflect all this progress.

In my opinion wall street will start the next rise. The current price is lagging compared to the ecosystem and the user numbers. The rise is overdue, it just needs a spark to start.

<- bull

[thezerg]

the one counter argument is that BTC's hype cycles seem so transparent and the payoff really good.  If a quant back-tested an algorithm that looks at twitter FB reddit traffic and could predict the ramp there would be the "edge" described in the article.  A player could expect a 10 bagger with bitfinex leverage getting you to 50x in one year.  This kind of payoff could justify a small investment.  This could be what happened in the recent BFX leverage to 32M.  Likely this kind of player would look for momentum, so we will not see him entering until there is a clear uptrend...

But this kind of person would try to dump at the top, so actually not really the sort of adoption we want anyway.  Best to not worry about Wall St and just look at and encourage international adoption.

[Hunyadi]

the one counter argument is that BTC's hype cycles seem so transparent and the payoff really good.  If a quant back-tested an algorithm that looks at twitter FB reddit traffic and could predict the ramp there would be the "edge" described in the article.  A player could expect a 10 bagger with bitfinex leverage getting you to 50x in one year.  This kind of payoff could justify a small investment.  This could be what happened in the recent BFX leverage to 32M.  Likely this kind of player would look for momentum, so we will not see him entering until there is a clear uptrend...

But this kind of person would try to dump at the top, so actually not really the sort of adoption we want anyway.  Best to not worry about Wall St and just look at and encourage international adoption.

Great points!