Wall Street’s 3 biggest bitcoin investors have one thing in common: the instinct to survive
Bitcoin may have started as a subversive technology intended to cut out the middlemen of traditional economics, but this year things got complicated. As the currency — and the technology behind it — have proved surprisingly resilient in the face of a wide-range of obstacles, the very organizations which once were the target of so much ire are now investors.
But a closer a closer look at the investment strategies of the New York Stock Exchange, Goldman Sachs and the Fortress Investment Group — three Wall Street mainstays that have ventured into bitcoin and the decentralized ledger technology behind bitcoin, called the blockchain, reveals there’s more to gain by getting skin in the game than just cold hard cash. Or as the case may be, warm, ethereal, crypto-currency.
How each of these three companies has invested so far, and how that investment has impacted perception in the mainstream economy reveals a lot about how these once-parallel economic systems might merge into one. Or at least, how the investors hope they do.
Fortress Investment Group
Fortress’s investments situate it deep into the DNA of bitcoin. From an initial investment in the actual currency to an investment in a hedge fund that in turn backs companies that focus on building tools for bitcoin, Fortress (NYSE: FIG), has already made a big impact on the crypto-economy by actually helping build new companies.
Sign Up for Newsletters & Alerts
Receive New York Business Journal’s Morning Edition and Afternoon Edition newsletters and breaking news alerts.
Currently valued at $3.35 billion, the investment group was — and so far is — the only of these these three New York financial institutions to invest in actual bitcoin. By investing in the currency itself, and not just in the people behind the companies, Fortress either fell victim to currency speculation that didn’t pay off, or revealed itself as a true, early believer. According to the company’s 2013 annual report, it secured $20 million worth of bitcoin, which by the end of that year was recorded as a $3.7 million “unrealized loss” on the balance sheet. The crypto-currency eventually plummeted from its peak of about $1,200 at the end of that year to about $277 today.
Then, in March 2014, Fortress executives doubled-down on bitcoin companies, even while backing off a bit on the currency, by moving its initial investment into a $150 million hedge fund, along with Benchmark, in exchange for an equity stake in Pantera Capital Management, which manages the Pantera Bitcoin Partners fund. Pantera has invested in nearly every major bitcoin investment over the past few years with the notable exception of Coinbase.
Pantera’s investments — and, by extension, Fortress’s bets — include participation in the largest bitcoin investment ever, $116 million in the company 21 earlier this year, a $20 million round in secure wallet Xapo, and two investment rounds totaling $67 million in Circle Internet Financial.
New York Stock Exchange
While Fortress doesn’t have a financial stake in Coinbase, the NYSE does. In January, at a time when the bitcoin world was waiting to see if this year would mark the end of the cryptocurrency or if it would finally see mainstream adoption, the stock exchange joined a $75 million round in the bitcoin wallet and exchange, the second largest investment ever in a bitcoin startup. With the help of the stock exchange, San Francisco-based Coinbase now has a total of more than $100 million in venture capital, and powers transactions for 39,000 merchants and 2.8 million consumer wallets.
The New York Stock Exchange’s investment in Coinbase was about as safe a bet as one could make though it proved a powerful symbolic gesture. Coinbase had already raised more than $30 million from proven investors such as Fred Wilson at Union Square Ventures in New York and Andreessen Horowitz in Silicon Valley, and was well-established as a market leader at the time of the investment.
But when, in May, the NYSE launched its bitcoin index (NYXBT), a daily price of bitcoin derived from Coinbase’s numbers, and eventually other bitcoin vendors, a potentially larger influence was revealed. The industry-wide confidence boost the index gave bitcoin has the power to give the exchange much more influence that the relatively small investment in Coinbase.
“Bitcoin values are quickly becoming a data point that our customers want to follow as they consider transacting, trading or investing with this emerging asset class,” said NYSE Group President Thomas Farley in a statement coinciding with the launch. “As a global index leader and administrator of ICE LIBOR, ICE Futures U.S. Dollar Index and many other notable benchmarks, we are pleased to bring transparency to this market.”
Goldman Sachs
In April, the New York-based investment bank, valued at $94.1 billion, led a $50 million Series C in Circle Internet Financial(Pantera also took part in this round). Based in Dublin, Circle is trying to make using bitcoin intuitive for the average person, as opposed to many bitcoin transactions that require a more advanced understanding of computers. By meeting non-users on their own turf Goldman’s investment is focused on the less-tech-savvy, but still-valuable users.
Like the NYSE’s approach to bitcoin, Goldman Sachs’ (NYSE: GS) investment is seen about as reasonably safe. Circle was founded by Jeremy Allaire, who in 2004 launched the $210 million video platform, Brightcove (Nasdaq: BCOV), a man widely considered one of the smartest people in bitcoin.
But Goldman Sachs’ managing director of the principal strategic investments group, Tom Jessop, explained in a statement that the company’s investment strategy went beyond just the management team and product. “As the financial services industry continues to become more digital and open, we see significant opportunities in companies and solutions that have the promise to transform global markets through technical innovation.”
The blockchain and what it all means
The Digital Currency Council’s Berger said that the participation of Fortress, the NYSE, and Goldman Sachs in bitcoin companies is still meant to benefit investors, even if in non-monetary ways at first. But perhaps the biggest benefactor in the immediate term was the cryptocurrency industry itself.
In May, New York City-based CB Insights published a report showing 14 mainstream financial services firms and corporations which have invested in bitcoin. In addition to the Fortress Investment Group, the New York Stock Exchange, and Goldman Sachs, 11 other global firms were on the list, including Google Ventures, Cisco, and Qualcomm.
What all these investments have in common is that they let each company dabble in bitcoin from a safe distance while at the same time giving an air of respectability to the bitcoin technology once almost exclusively associated with black markets. Perhaps, more importantly though, these investments will help the companies which made them understand the decentralized ledger technology behind bitcoin, called the blockchain.
Last month the former CEO of the New York Stock Exchange, Duncan Niederauer, joined a $1.25 million seed funding round in Symbiont, a startup positioning itself to stand at the bridge between Wall Street and the burgeoning crypto-economy. “We are trying to do for settlement and clearing of securities what has already been done, partially, for payments by bitcoin itself,” said Adam Krellenstein, founder and CTO during an interview from his Wall Street offices. “We’re trying to extend the vision to new sets of assets and asset classes, but the vision is still compatible and it’s an extension of the original goals.”
While Niederauer decided to dabble by investing cash, in March, New York City-based Digital Asset Holdings LLC, launched with Blythe Masters, the former chief financial officer of JP Morgan who the Guardian once called the most powerful woman on Wall Street as their CEO. The company has a similar goal of creating digital versions of traditional financial assets using the blockchain, but based on two recent acquisitions doesn’t appear to be planning on using bitcoin’s blockchain, but rather their on technology.
“I think they are hedging their bets,” said Lee Arthur, managing director the New York Institute of Finance, describing Wall Street investments in bitcoin. Arthur’s company has been wrestling with the problem of how to educate the next generation of financiers in such a quickly changing market. “If ever you are a dominant player in the space and there are potential disruptions you’re smart to invest and be involved.”
The price of bitcoin jumped $20 this weekend from $253 on Friday to about $273 at the time of publication, possibly attributable to Greece’s vote July 5 against the Eurozone bailout. In March 2013 a similar jump occured on a larger scale coinciding with the Cyprus bank bailout. In both situations the currency could be viewed as a more stable option for storing cash.
by 