Tim Bourgaize Murray: The Real Value of Virtual Expertise
Do you need to understand blockchain to enter the BTC derivatives market?

It’s a classic argument in Silicon Valley today, just as it has been throughout any historical technology boom: Do you really need technology expertise to lead a successful technology venture? Go back more than a century to the once-mighty Bethlehem Steel, which came into its own when two men took over the boardroom: Charles M. Schwab, an engineer, and Joseph Wharton, who, while having some training in chemistry, was much better at building businesses.
Fast forward to today. Many highly profitable apps are dreamed up and actualized by people with no developer knowledge at all. In other cases, including many that have gone on to become massive public companies, the technologists ran the show from day one. So the answer to the question, as often, is: it depends.
The Right Skills
This goes some way toward explaining sentiment I heard, somewhat to my surprise, from a couple of sources this month—all of them Wall Street veterans. They’re breaking into bitcoin, or fashioning a related derivatives market around it, without in-depth knowledge of the digital currency or how the underlying blockchain and wallet technologies work.
In fact they’re making no bones about staying as far away from BTC as possible. Instead, they’re betting that their skills in running financial markets will successfully transfer. Bitcoin being involved is somewhat less important, actually, besides the fact that it’s a growing market, and quite underserved.
And there is some sense to this. As long as the price of a commodity can be soundly determined, it’s immaterial for a derivatives market operator to actually touch the underlying commodity. Making markets in natural gas futures doesn’t demand any particular skills in hydraulic fracturing, for example. Insofar as developing a good business model is concerned, staying away from the “physical” bitcoin (to the extent a virtual currency can be physical) and its extreme volatility isn’t the worst way for a trading venue to go, either.
As long as the price of a commodity can be soundly determined, it’s immaterial for a derivatives market operator to actually touch the underlying commodity.
Bilateral Trade
Will it stick, though, or come off as a half-effort? After all, even though 2008 seems further away with each passing year, market participants and regulators alike still have keen memory of derivatives being developed and sold of which—it turned out—the industry had far too little knowledge.
A still louder alarm bell rings with venues that propose, at least for now, to have those products trade bilaterally rather than on an order book and centrally cleared. And, for now, most of them fall into the former category.
Testing the Limits
With major retailers and distributors beginning to accept bitcoin, the sell side will continue to expand its BTC focus as well as assess certain aspects that could be directly applicable to capital markets, too. As long as the price remains somewhat volatile, proprietary traders and hedge funds are going to be interested, as well.
When Blythe Masters, principal trading legend Don Wilson, former NYSE chief Duncan Niederauer and countless technology evangelists in California are all getting in, it’s clear there is real opportunity—this isn’t just blowing smoke or chasing chimeras. I suppose the issue is how new and untested the market remains, and perhaps as a result, the extent to which genuine technology expertise around bitcoin is still limited.
It’s only a good thing that we’re seeing such a wide array of approaches to the different challenges associated with the currency; after all, one is bound to stick. But just as I would’ve asked an early steel maker to explain the Bessemer process to me before buying his wares, I would probably test a bitcoin venue out on its knowledge of distributed ledgers or crypto-security before jumping in, whether their product settles in BTC or not. That just makes plain sense.
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