Posted February 10, 2021
By Ray Blanco
Bitcoin + GameStop = $$$$
The dust is finally settling on the GameStop saga.
Like I told you last week, I don’t think it ends well for retail investors who still own shares.
In the middle of the brouhaha was drama over the decision at Robinhood and other brokers to stop letting retail investors buy shares of GameStop.
Conspiracy theories continue to swirl, but the actual reason they halted buying was much more mundane…
Brokers simply couldn’t afford to meet the requirements set by the firms that clear their trades. Robinhood in particular found themselves in a tough spot because of the fact that traders using their platform were far more likely to be buying GameStop than other brokers’ clients.
The GameStop fiasco is turning investors’ attention to the boring trade settlement process — and how it potentially cost them a ton of money this month.
Meanwhile, one speculative asset that’s ripping higher is Bitcoin.
Prices for the cryptocurrency rocketed near $50,000 after Elon Musk announced that Tesla had bought $1.5 billion worth of Bitcoin and would begin accepting it as payment for cars.
Today, I want to show you how the technology that powers Bitcoin could help ensure that brokers never need to halt trading in a fast-moving stock like GameStop again…
This groundbreaking tech could be coming to your portfolio soon — yet very few people know anything about it.
I told you a second ago that Robinhood and other brokers were forced to stop letting folks buy GameStop earlier this month because of their clearing firms. When you buy a stock, you don’t own shares immediately. It actually takes two business days for your trade to settle — in Wall Street parlance, that’s known as “T+2.”
When settlement happens, whoever sold you your shares has to come up with the stock certificate and you get added to the list of shareholders.
In the meantime, brokers have to pony up some cash as collateral for the trade.
In the case of a supervolatile stock like GameStop, that collateral increased dramatically since the risk of GameStop moving meaningfully between the trade and settlement (and one party failing to pay up) spiked.
When you trade at a broker like Robinhood, you typically have access to funds immediately, even if it takes a couple of days for your deposit to get from your bank to Robinhood. That means the broker is on the hook in the meantime — and they’re stuck with the bill for the trade collateral until your cash shows up a day or two later. That’s why they restricted buying.
No matter what you think about Bitcoin, blockchain, the tech that powers Bitcoin and other cryptocurrencies, offers one big advantage: It pairs buyers and sellers and settles trades almost immediately.
Already, big players like JPMorgan are using blockchain for internal transactions.
And a startup called Paxos just got SEC approval to use blockchain to settle stock trades in a pilot program with two brokers.
Using blockchain to settle stock trades would completely prevent a situation like the one in GameStop this month. And the companies pioneering blockchain tech stand to profit in a big way.
Right now, Paxos is privately owned, but companies like PayPal (NASDAQ: PYPL) own stakes in it. We’ll be watching this space closely and sharing potential blockchain-related plays.
Meanwhile, the GameStop debacle could help accelerate the adoption of blockchain tech in old-school markets. Stay tuned.
Jonas Elmerraji, CMT