In financial markets, the price is everything and it is determined largely by supply and demand. Information about who owns an asset and who wants to buy that asset is a key driver of the price. In the equity market for example, traders will often focus on things like where the money is flowing and what ‘insiders’ like hedge funds and pension funds are doing with their equity holdings. This level of detail is easily obtainable and if the transaction is large enough, the details of transacting parties are reported to the market.
This level of transparency is not only useful for market regulators, it also provides insights that will often affect sentiment towards a stock and influence other market participants.
Bitcoin ownership is not transparent
When it comes to bitcoin and other cryptocurrencies, however, the opposite appears to be true. Many see the lack of transparency and complete anonymity of ownership as a positive attribute.
In a digital world where hacking and cybercrime is always a threat, those with a sizeable hoard of digital coins appear keen to keep a low profile not to become a target. They may hold a number of wallets, so the risk is spread. The technology and processing of cybercurrencies also supports anonymity – the blockchain ledger that records each and every transaction does not display names or details of the participants, meaning they are essentially anonymous.
This is a clear concern for governments, with the US Internal Revenue Service (IRS) declaring that in 2015 only, 802 individuals claimed profits or losses in relation to bitcoin transactions. That could change soon though, with startups such as Chainalysis creating software which tracks transactions and offers greater insight on who is buying and selling bitcoins to tax authorities, police and banks. That may be the start of increased transparency in the cryptocurrency market, although it will take time to resemble more mainstream markets like equities and other exchange traded instruments, if indeed it ever gets that far.
Bitcoin is now being covered by a handful of investment bank analysts, and if we see momentum build towards more efficient bitcoin processing, in turn leading to wider acceptance from retailers and a less dominant position for PayPal, this may be the point when bitcoin really comes onto the institutional fund's radars as an alternative investment.