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Wall Street Buzz: Merrill Lynch Bans Bitcoin For Its Clients

In a move that sounds similar to that taken by JPMorgan CEO Jamie Dimon, Wall Street bank Merrill Lynch has banned its financial advisors from buying Bitcoin-related investments for their clients.

The decision comes as the major bank has concerns “pertaining to suitability and eligibility standards of this product,” according to an Internal memo reviewed by the Wall Street Journal.

Going against the grain

The decision taken by Merrill Lynch prevents roughly 17,000 advisors pitching anything to do with Bitcoin or even executing clients’ request to trade Grayscale Bitcoin Investment Trust (GBTC).

The GBTC is one of the major avenues in which Bitcoin can be traded on Wall Street. It is traded over the counter, rather than through a formal venue like the New York Stock Exchange. The Bitcoin trust is the top holding of two of Ark Invest’s exchange-traded funds, which unsurprisingly were among the top performing ETFs last year.

The recent opening of futures on CME and CBOE have also given rise to new ways in which institutionalized investors can get involved in this new asset without the fear of venturing into unregulated waters.

However, Merrill Lynch has already acted upon these avenues as it previously banned access to these futures.

Steadfast

Merrill Lynch clearly sits on the one half of the divide over Bitcoin that is denying its possibilities and thus denying its clients a shot at the growing asset. However, that side of the battle seems to be softening.

A look at the way in which JPMorgan has distanced itself from their CEO’s comments shows how it is becoming harder and harder to keep avoiding Bitcoin.

Bitcoin’s success on Wall Street is yet to be seen as its price rally towards $20,000 was catalyzed by the impending futures announcement, but since they have launched there has been a decline in Bitcoin’s performance.

According to John D’Agostino, a former Nymex executive and current exchange board member, many are trying to get into the game, but wondering if they can do it within regulations.

“Every research department of every regulated exchange is saying, ‘Can we do this?’ The majority of costs associated with that are marketing. If people want to trade this thing, why wouldn’t you? This is a gift from the heavens.”

Learn and understand

These bans, from the ICO ban in China to the banning being done by banks, is also being attributed to misunderstanding and lack of knowledge.

Many Bitcoin believers slammed Jamie Dimon for his lack of knowledge, and the same seems to hold true for Merrill Lynch.

Tech investment company Wamda Capital CEO, Fadi Ghandour said of Dimon:

“It is here to stay. Jamie Dimon needs to recognize that before he talks about it from a fraudulent point of view. Talk to them, understand them, find a way to regulate them. Let’s not make big statements about something we don’t understand. Be humble, calm down, come down to earth and learn.”

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No Bitcoin For The People Yet As GBTC Withdraws SEC Application

The massive gains in the GBTC (Grayscale Bitcoin Investment Trust) share value this year (508 percent) are not enough to get it through approval with the Security and Exchange Commission (SEC) for trade on the New York Stock Exchange’s Arca exchange. While regulations are fast moving toward Bitcoin acceptance, the current SEC climate is not ready. According to the fund managers:

“Although digital currency market regulation continues to rapidly evolve, at this time Grayscale does not believe there have been enough regulatory developments to prompt the SEC to approve the application.”

The move may be wise, given the current regulatory climate the SEC has instituted. Recent changes in leadership notwithstanding, the general SEC tone toward cryptocurrencies and ICOs has been cautious.

Hurdles for Bitcoin

The withdrawal from the exchange identifies one of the major hurdles to acceptance of Bitcoin, namely the seemingly technical nature of the cryptocurrency. GBTC has sought to bring Bitcoin into the mainstream by helping investors to purchase Bitcoin but through the vehicle of something far more familiar – stocks.

Currently, GBTC is traded ‘over the counter’ – an insider term for trading on less formal exchange platforms. Nevertheless, fund shares trade at a dramatic premium to the Bitcoin the fund actually holds. GBTC closed at $739.50 per share yesterday, while each share holds approximately $375 in Bitcoin.

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Bitcoin Owes Success to Three Different Waves of Innovators

Cryptocurrency is a complicated mixture of several different fields, which contributes to the difficulty people have in understanding it. Even the term is confusing and often leaves novices scratching their heads. However, the multidisciplinary nature of digital currency is also probably one of its greatest strengths.

Three different types of people are drawn to cryptocurrency: cryptographers/computer scientists, crypto-anarchists and finance professionals. Each of these types brings their own unique insights and perspectives.

The first wave: cryptographers and computer scientists

Bitcoin was invented and developed by the truly brilliant Satoshi Nakamoto. Although nobody knows Satoshi’s identity, we do know that the genius was exceptionally skilled in both cryptography and software development.

Cryptography is a rather eclectic field, the forte of mathematicians and codebreakers. Satoshi possessed a strong knowledge of cryptography, and when he combined it with his understanding of computer science, he discovered the solution to a vexing problem.

For years, some rather brilliant people had tried to devise a way to enable the transfer of value among a network of people who don’t trust one another. Such trustless transactions would have the potential to disintermediate the finance world completely.

Satoshi’s solution was the Blockchain, which serves as a perfect, trustless, distributed ledger of all transactions done on the currency network he created: Bitcoin.

Satoshi announced his development on the cryptography mailing list, an obscure forum frequented by some of the best cryptographers in the world. Hal Finney was one such person, and he worked with Satoshi very early in the Bitcoin’s history. In fact, the first Bitcoin transaction that ever took place was when Satoshi sent funds to Finney to verify that the software actually worked.

Over time, more and more cryptographers and computer science gurus became associated with Bitcoin, and sometime in 2012, Satoshi vanished. Others carried the torch and continued developing the protocol.

The computer scientists and cryptographers are the founders and maintainers of Bitcoin.

The second wave: crypto-anarchists

The second wave of digital currency enthusiasts were the crypto-anarchists. They saw Bitcoin as a way to liberate the world from the grip of oppressive governments and their fiat-based financial systems. This group tended to be politically motivated and unwilling to compromise on their basic principles.

Much of Bitcoin’s anti-establishment, decentralized culture comes from this group. Satoshi himself likely sympathized with their philosophy, based on posts he made to the mailing list and on BitcoinTalk.

Because of their nature, this group abhors all attempts to regulate digital currency. To them, cryptocurrency isn’t about becoming rich or achieving mainstream adoption. It’s a social and political movement.

The crypto-anarchists are the heart and soul of Bitcoin. They work hard to ensure the project remains decentralized and true to its founding principles.

The third wave: finance experts

Somewhere around the end of 2013, the digital currency sector caught the notice of finance professionals. This group is generally less politically motivated and more willing to compromise on issues such as regulation and taxation. They seek mainstream acceptance and adoption of cryptocurrency.

These finance specialists, many of whom have Wall Street credentials, have been highly successful in increasing the adoption of digital currency. With their help, Bitcoin has made significant inroads into the traditional financial system, and its value has boomed.

Some, like the Winklevoss twins, have sought to establish options for mainstream investors to participate. Though their proposed exchange-traded fund (ETF) application was denied earlier this year, they have appealed the ruling. Recent changes in key SEC personnel could aid their cause.

Likewise, Barry Silbert founded the Digital Currency Group which has full or partial ownership of a number of important Bitcoin-related companies. The Digital Currency Group owns Grayscale Investments, which sponsors the Bitcoin Investment Trust.

This trust is publically traded under the GBTC ticker, and its value is backed by sizeable Bitcoin holdings. GBTC is one of the only ways that US investors can expose their tax-advantaged retirement accounts to the price of Bitcoin.

Entire currencies, such as Dash, have been created when finance professionals discovered something that was missing in existing cryptocurrencies. Dash was founded by Evan Duffield, who himself holds a Series 65 license, and who realized that proper incentivization was missing from Bitcoin and other currencies.

Rather than relying on altruism to get people to run full nodes (as is the case with Bitcoin), Duffield thought these “masternode” owners should be paid for maintaining a copy of the full Blockchain (and performing other services for the network.)

While the number of Bitcoin nodes has been declining over the last several years, the number of Dash nodes has been rising.

A company called LedgerX will soon release a regulated market for the trading of Bitcoin futures, following the CFTC’s approval of their request this summer. This will allow traditional, mainstream investors to expose themselves to Bitcoin more readily, and will likely prove a crucial step in an ultimate ETF approval.

The finance group is responsible for much of the Bitcoin’s mainstream acceptance to date. They have brought in institutional money and are continuing to build on-ramps for traditional investors to gain Bitcoin exposure.

Multi-disciplinary

Bitcoin’s strength comes from the fact that so many disparate groups are interested in developing the project.

At first glance, it might appear that the programmers and cryptographers are solely responsible for Bitcoin’s success, but this isn’t so. Crypto-anarchists, financiers and others have all played meaningful roles.

Other talented individuals and groups will likely be attracted to digital currency in the future, and they likely have unforeseen roles to play as well.

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Altcoins Use Bitcoin Ecosystem to Leapfrog Forward, Grow Faster

Anybody who was drawn to Bitcoin in the very earliest days might have been put off by one significant fact. Bitcoin’s biggest exchange, where they would likely go to purchase the currency, was bizarrely called: “Magic the Gathering Online Exchange,” or Mt. Gox for short. Anybody who was confused as to why they needed to go to a “Magic the Gathering” website to purchase Bitcoin probably just went ahead and closed their browser.

A nascent economy

Mt. Gox is just one example of the type of services (or lack thereof) provided during Bitcoin’s infancy. Eventually more reputable exchanges would come along, and sites like Coinbase would make buying Bitcoin quite simple. But these conditions took time to develop.

Before Bitpay and its ilk, merchants who wanted to accept Bitcoin had a difficult time doing so. Integration into their ecommerce platforms was extremely difficult, and they were constantly exposed to Bitcoin’s famous volatility. Eventually payment processors would come along that converted Bitcoin into fiat immediately, making Bitcoin acceptance much easier for traditional businesses.

Companies like Blockcypher would eventually develop APIs to help integrate Bitcoin more readily into various web services. The Bitcoin Investment Trust would make it easier to expose one’s traditional investment portfolio to Bitcoin via shares in GBTC. Still more companies have arisen to fill various other niches in the ecosystem.

There are now accountants who specialize in Bitcoin, lawyers who are experts on the subject and a litany of lobbyists who promote the interests of Bitcoin owners. Even more important, the media has reported time and again on Bitcoin and begun familiarizing the public with the concept of digital money.

The second wave

All of these companies and services add significant value to Bitcoin’s network by filling important roles in the ecosystem. Yet Bitcoin’s very success has paved the way for challenges from would-be contenders.

These so-called “altcoins” find that there is no need to reinvent the wheel. It took years for Bitcoin to gain the kind of traction needed for people to build Coinbase, Bitpay, Blockcypher and others. Yet a promising altcoin can usually be integrated into any of these services within weeks or months.

There is no need for altcoin investors to wait years and hope that savvy businesspeople will come along and build a quality exchange, or payment processor, or API service. Altcoins are able to very quickly capitalize on the work Bitcoin has done.

Bitcoin businesses, for their part, would be foolish to ignore the money that holders of the top altcoins can bring to their platform. Since these digital currencies don’t have to wait years for new companies to be built to service them, they are able to grow and mature much more quickly than Bitcoin did.

Lawyers and accountants who specialize in Bitcoin don’t have to relearn everything in order to assist customers with other forms of digital currency. Their expertise applies to altcoins just as well as it applies to Bitcoin.

Dash doesn’t have to lobby Congress for friendlier regulation. Neither does Ethereum, or Litecoin, or Zcash, or any of the other hundreds of coins in existence. Bitcoin has already cleared the way, and continues to do so.

Leapfrog

Many developing countries never bothered to build a wireline telephone network. There was no need. By the time they were able to fund such a project, mobile phone technology had already been invented. In this way, the developing world skipped decades of waiting for technological progress, instead advancing quickly to the present state-of-the-art.

The cryptocurrency world is advancing in much the same way. When Bitcoin developers create promising new code, it is quickly copied by eager altcoin developers. This happened recently, when Litecoin adopted Segregated Witness.

The technology was designed for Bitcoin by Bitcoin developers, but was actually deployed on Litecoin’s network before Bitcoin adopted it. Even though Bitcoiners did all the work, Litecoin benefited before Bitcoin did.

In the meantime, innovative altcoins continue to develop new features that Bitcoin can’t – or won’t – adopt for its own. Bitcoin is too big to take the risks that many altcoins can take. After all, it’s much easier to risk breaking a $100 million network than a $70 billion one.

Bitcoin’s biggest advantage is branding and network effects. There is no easy way to duplicate that. In every other way, expect altcoins to continue surging ahead as they take advantage of the smooth road Bitcoin has cleared.

Of course, there’s no need for there to be only one successful cryptocurrency. The market is almost certainly large enough for multiple currencies to succeed. In a very real sense, this sharing of code and services could be called “collaboration” rather than “competition.”