With no ‘JPMorgan of bitcoin’, exchanges struggle to win trades

Bloomberg

Bitcoin needs “Downtown” Josh Brown more than he needs bitcoin. Brown, the chief executive officer of Ritholtz Wealth Management and author of a popular finance blog, has long been skeptical of the digital currency. He finally bought some, he said, “because the goddamn thing won’t go away.”
Still, Brown, who helps manage half a billion dollars, isn’t really a convert quite yet, especially when it comes to security measures at bitcoin exchanges. He researched several before buying his bitcoins at Coinbase Inc. and wasn’t impressed, he said. “I don’t think any one service is safer than another. It’s too early to anoint any of them as the JPMorgan of bitcoin. I don’t think that exists.”
Such concerns are the biggest obstacle to growth in the market for cryptocurrencies like bitcoin or ether, the second-biggest.
Even as investors are lured by their price gains and volatility, the biggest institutions are reluctant to get in, raising further concerns about liquidity.
The challenge for exchanges like Coinbase and Gemini Trust Co. is persuading major financial players that the $121 billion market for digital assets meets 21st Century standards.
The dangers are apparent. On June 21, ether crashed to 10 cents from $317.81 in trading on Coinbase. The cause was a single $12.5 million trade—one of the biggest ever—that triggered further selling. It all happened in just 45 milliseconds, after which computer algorithms started buying, driving prices back up to $300 within 10 seconds. Some digital coin exchanges have collapsed or customer funds have disappeared.
All of which is scaring away the very investors the exchanges need to succeed.
Cumberland Mining, a unit of Chicago-based high-frequency trading firm DRW Holdings LLC, handles many big orders privately “because the exchanges and other marketplaces can’t handle that type of liquidity or don’t have that type of liquidity,” said Bobby Cho, a cryptocurrency trader. “The marketplace is so fragmented that liquidity is fragmented.”
When Brown bought his bitcoin, he was unaware that the purchase wasn’t secured on the blockchain, that it was only held internally at Coinbase. That puts extra pressure on markets to maintain security to thwart hackers and thieves.
After Brown wrote about buying bitcoin on his blog, “People were screaming at me, ‘Coinbase is not for storage!’” he said. In response, a friend helped him set up a wallet to hold his bitcoin that is secured by the blockchain.

Wild West
“It’s the Wild West, it’s very much early days still,” said Richard Johnson, a market-structure analyst at Greenwich Associates who specialises in blockchain. Johnson agreed that the time and complexity of moving digital currencies from one exchange to another is “not acceptable” given how modern investors operate, and that while Gemini, Coinbase’s GDAX and other US-based exchanges have strong know-your-customer procedures, more needs to be done. “If people want to get serious about this for real banking transactions, it needs to be better and easier to use.”
Investment money continues to pour into digital assets. Coinbase said that it received a $100 million investment from a group led by IVP. It plans to use the money to expand its engineering and customer support staff, open a New York office for its professional trading platform GDAX and grow Toshi, “a mobile browser for the ethereum network for universal access to financial services,” said Megan Hernbroth, a spokeswoman.