Bitcoin: Needs Cross-Exchange “Prime Brokerage”

Ok, what I am going to say here is probably Bitcoin heresy, in that I am going to advocate more centralized clearing and management of assets wrt exchange trading.

I want to be able to scale trading in bitcoin and execute across multiple exchanges.  However have the following problems

  • lack of trust in (most) of the bitcoin exchanges
    • security of the exchange against attackers
    • degree of trust in the ownership re: my assets on deposit
  • inability to trade across a variety of exchanges on a net / credit basis
    • require depositing cash (fiat) and/or bitcoin on each exchange

Solution

I want to keep my “working” fiat & bitcoin assets for trading with a trusted agent (a “Prime Broker” in the traditional trading space) who will grant me credit across a fairly wide range of exchanges.   To completely isolate both the trader and the prime broker from exchange risk:

  • exchanges should not hold trader’s bitcoin or fiat
  • exchanges send/receive net fiat funds + cryptocurrency to/from Prime Broker based on net P&L + fees
  • reconciliation between exchange and PB done as a secure transaction between the two.  Could probably devise a protocol based on asymmetrical trust, which is near-transactional.  The element which is least transactional is the wiring of funds (amusingly).
  • much of the reconciliation can be done intra-PB or between PBs

Case in point, exchanges such as BTC-e trade BTC/USD at a 100-150bp discount to bitfinex.  Why?   I think this due to the perceived credit risk of depositing funds with BTC-e and possibly issues in moving assets to net.

Perhaps there is an even more interesting angle, PrimeBrokerage V2, using the bitcoin ledger, ascertaining trust, etc.    But for the moment, taking exchange risk out of the equation would open up the market further.

Advantages

Above and beyond solving the trust issue, more centralization or a way to coordinate amongst exchanges could help with:

  • “locate”: the process of finding cryptocurrency that can be borrowed for shorting
  • potentially offer a meta-exchange, where participants can interact with a cross-exchange orderbook, data, etc.
Advertisements

5 Comments

Filed under strategies

5 responses to “Bitcoin: Needs Cross-Exchange “Prime Brokerage”

  1. LinuXPoWa

    You want do arbitrage with bitcoin ?

    • tr8dr

      No, not really interested in arb. Most of the “arb” I see in the market is related to credit disparities. I *am* interested in removing exchange credit risk from the equation, so can trade decent size without having to worry about the exchange disappearing with my capital.

  2. Pingback: 1 – Bitcoin Needs Cross Exchange Prime Brokerage | blog.offeryour.com

  3. hunterhorsley

    Have any solutions to this emerged since 2015?

    • tr8dr

      I think the problem still exists. There may be some startups / solutions in stealth mode attempting to address this problem.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s