Everything old is new again. Remember Forex? Hotspot? Lava? When unregulated third party exchanges started popping up they changed the dynamic of foreign exchange trading dramatically. While arguably still heavily influenced by the banks (don’t get me started on last look liquidity for those familiar), the available liquidity and access to those markets was simplified. Now the average consumer can trade Forex in minutes, and despite the risk, many do. This has created a vibrant and diverse market, with multiple exchanges, and consumer platforms vying for dominance.

The thing is, almost every single Bitcoin company is a trading company in disguise, they all have similar pipelines and they all perform variants on the same function. You can call it payment processing if you want, but the process looks more like a trade execution system then anything approaching traditional payments. Let’s run through the major players:

  1. Bitpay and every other payment processor on the planet, Takes your Bitcoins sends them to an exchange and gives the merchant dollars. They are on the sell side in order to meet the cash obligations to merchants.

  2. Coinbase, Circle, BitReserve, et al. Takes your money and gives you Bitcoins. So they transfer money from your account, put it on an exchange, and credit you Bitcoins. They also perform the reverse function on settlement so they are buy and sell side. This means they can make a two sided market based on customer order flow.

  3. Robocoin, BitAccess, etc. Takes your cash or Bitcoin at an ATM, trades it out on an exchange, and gives you the equivalent. Two sided trading liquidity, although I imagine they are more heavily buy side.

  4. Alphapoint, shapeshift.io and others. Does order execution and platform services. That is called an order routing engine. That means they take an order, and fulfill it at one of many exchanges based on best-price or some other metric.

  5. Coinsetter, BTC China, Kraken, Cryptsy, Bitstamp, Bitfinex, the list goes on and on. They have matching engines and run two sides markets taking order flow from the above companies and consumers and matching buyers and sellers. This is the exact same model that all of the early 2000s era Forex companies had.

Are we noticing any commonalities here? The only thing amazing about this list is how the existing well established, funded Forex platforms haven’t jumped on the bandwagon. There is nothing interesting from a technology perspective here, thousands have done it before. It would take them seconds to add unregulated third party Forex to digital currency swaps but they haven’t. There is an acquisition argument there, that existing platforms will just consume the new ones that have an understanding of handling digital currency payments.

Further, we have to ask ourselves exactly what function many of these companies perform. Order routing has complexities but isn’t exactly rocket science. Why can’t my digital wallet simply trade out on an exchange of my choosing if I want cash? Why am I paying the spread on these transactions when I can directly go to the market myself? Digital currency allows us to do frictionless transfer, so couldn’t an exchange accept a payment on my behalf and notify me when I had cash waiting? Obviously this is a simplification of the problem, but it seems we have a lot of middlemen inserted into a process that ultimately doesn’t need them.

In the end every Bitcoin company breaks down into just a few steps, and we are going to see modular open platforms that independently perform those steps. This is going to generate a tremendous amount of unstructured dumb liquidity. If you remember the explosion in growth of third party Forex, its time to make a stand in Bitcoin and digital currency. It’s happening here right now.

Comments