Hedge Funds

How bitcoin could overcome its wild reputation

Key Points
  • A lack of liquidity may be to blame for bitcoin's excessive volatility nature, an expert tells CNBC.
  • Cedric Jeanson, CEO of BitSpread, suggests adding market makers to bitcoin exchanges as a solution.
Banks still playing catch-up with bitcoin, expert says

A major problem for bitcoin is its extreme volatility, which is a cause of concern for many investors. A lack of liquidity may be to blame for the cryptocurrency's volatile nature, an expert tells CNBC.

"The high volatility I think is due to the low liquidity we have on exchanges today," Cedric Jeanson, CEO of BitSpread, told CNBC's Street Signs on Thursday.

Bitcoin has attracted a lot of criticism in recent weeks from big names including JPMorgan's Jamie Dimon and Bridgewater Associates founder Ray Dalio. A common criticism is that bitcoin is too volatile to be an effective store of wealth, unlike gold.

The digital currency is currently trading at $3,883.76 per bitcoin. Year to date its value has risen by 289 percent, according to data on CoinDesk, but bitcoin also fell from a record high of around $4,991 at the start of September to as low as $2,989 by the middle of the month. That's a loss of 40 percent over less than two weeks.

Jeanson suggests that having more market makers, such as his company, can help to improve this liquidity problem.

"The important thing is to add market makers on these exchanges and have the appropriate rules, (such as) anti-money laundering and Know Your Customer, around those exchanges," he said.

Chris Ratcliffe | Getty Images

Bitcoin's liquidity problem has repelled investors from the market for some time. Data from Morningstar published in May revealed only four out of 10,000 mutual funds in the U.S. held bitcoins in their portfolio. This aversion to bitcoin was attributed to the lack of liquidity.

"From a mutual fund perspective, liquidity is paramount," Todd Rosenbluth, director of ETF and mutual fund research at CRFA, told Reuters.

Rosenbluth suggested that more funds would invest in bitcoin if there was an exchange-traded fund (ETF) which held the digital currency. Shares in the ETF could then be easily bought and sold or used as hedge allowing investors to speculate on bitcoin's price movement without needing to directly own the digital currency.

For instance, many investors trade shares in the $34.32 billion SPDR Gold Trust ETF in order to gain exposure to gold.

Make way for market makers

BitSpread is a cryptocurrency wealth manager. One of its investment strategies, called Blockchain Wealth Active Growth, has grown 1,218 percent since its inception in June 2014, according to the company's website.

Jeanson says its funds are adding liquidity to some exchanges around the world. These exchanges are selected based on due diligence and whether they have the right rules.

"We are quoting at the moment something like half a billion dollars of bitcoin or digital currency every month. We became, I think, the biggest market maker on those selected exchanges," he said.

One other factor that may help to reduce volatility is greater regulation. Several countries, including Japan and China, are making moves to regulate crypto currencies. Market watches see these regulations as helping the market to mature and become more mainstream. Jeanson called this "great news" for digital currency.

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