New York City-based SolidX has raised $3m to bring financial instruments – including 'total return swaps' – to large institutional bitcoin investors.
Founded in early 2014, SolidX’s funding round came from a group of investors led by Liberty City Ventures and hedge fund manager James Pallotta.
The team at SolidX is comprised of professionals with backgrounds on Wall Street. The company sees a huge opportunity to provide the traditional finance industry a way to access bitcoin.
SolidX CEO Daniel Gallancy told CoinDesk the company wants to provide a Wall Street with bitcoin investment tools:
“Institutional investors, a large pool of capital, have largely been left out of what is a tremendous innovation.”
A way to institutionally invest
Gallancy has a proprietary trader and tech sector investment analyst background. He’s also been paying attention to bitcoin since 2011. The problem, he said, is that bitcoin is a tough sell to the people making investment decisions in the millions of dollars.
He says Wall Street analysts, “are very aware of bitcoin, a lot of them think it's great. [But] they can’t pitch it to their portfolio manager because there’s no real way for them to buy.”
Gallancy said this is why SolidX is bringing the total return swap to bitcoin:
“We offer financial entities, hedge funds and family offices a total return swap – an instrument they are very accustomed to dealing with.”
A total return swap allows buying or short selling of a security that an investor does not have direct access to.
The total return swap is a form of derivative used, for example, by many investors when buying securities in a foreign market where access is limited to only local investors. In this same way, the total return swap offered by SolidX gives an institutional investor an avenue to bitcoin.
The flexible swap
The term ‘swap’ received a negative image during the 2008 financial crisis – especially the credit default swap, which was a complex instrument used in theory to limit exposure to credit risk.
Gallancy told CoinDesk the total return swap is simpler:
“A swap, for all intents and purposes, is simply a legal contract. You are entitled the dollar return on the underlying asset.“
“The idea is to give a return on the underlying asset without having to think about anything except for its price,” he added.
The company gave careful thought to choosing the right financial instrument to provide wider investor access to bitcoin. SolidX eventually chose the total return swap as the right vehicle to get off the ground, as it is flexible enough to work with any block chain-based technology, not just bitcoin.
Other block chain-based currencies, should they become popular, could conceivably be used by this particular instrument in the future.
“We didn’t just jump right into this,” said Gallancy. “One of the reasons we chose this is because of the flexibility of swaps. “
Bitcoin in financial markets
As bitcoin becomes more well-known on Wall Street, investment funds will want to put capital into the digital currency. This is what the financial industry as a whole does – it’s always on the lookout for new financial opportunities.
Gallancy also noted Bitfinex offers bitcoin swaps on its platform. However, he said SolidX is offering an internationally recognized swap as accredited by the International Swap and Derivatives Association, or ISDA.
It’s possible SolidX’s entrance into the market could mean further institutional investment into digital currencies outside of major VC funds that have put money in bitcoin startups.
David Lehmann, SolidX’s president, told CoinDesk:
“While institutions to date are invested on the venture capital side through Andreessen Horowitz and Fortress, we believe that financial institutions are going to want exposure to bitcoin as an asset class.”
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