Cryptocurrency can be intimidating, but a new platform called Catalyst would enable investors to build their own investment funds.
In recent months, the prices of virtual currencies bitcoin and ethereum have soared to record highs amid increased investor interest.
On June 1, bitcoin traded at $2,429.20—up from just $536.42 a year before. Newer rival ethereum was priced at $214.84, a more-than-1,300% gain over its price of $13.96 a year previously, according to data from bitcoin news and information service CoinDesk.
But for many would-be investors, cryptocurrency can be intimidating. The purely digital currencies, which enable transactions through cryptographically secure, shared ledgers known as blockchains, are ultimately built around esoteric mathematical concepts and open source code. Heated debates among their developers about how that code should evolve are not unheard of, sometimes precipitating wild swings in the currencies’ trading prices that can make it difficult for casual investors to make sense of when to buy or sell. And users of at least two major bitcoin exchanges that trade the currency for traditional funds have been the victims of multimillion-dollar digital heists.
“A lot of people are starting to look into it, and invest in it, but it’s still very much kind of like the Wild West,” says Guy Zyskind, cofounder and CEO of Bay Area startup Enigma.
Enigma, started by a group of Massachusetts Institute of Technology (MIT) graduates, aims to help change that with a platform announced this week called Catalyst, which would enable ambitious cryptocurrency investors to effectively build their own investment funds, using algorithms of their own choosing to decide when to buy and sell the currencies. Catalyst would track their performance on a digital leaderboard, and ultimately other users of the platform would be able to invest their own money in the funds, likely paying management and performance-based fees to fund managers as with traditional investment funds.
“In the normal stock market, a lot of the trading is being done by AI today,” says Zyskind. “We’ve seen similar demand coming in the cryptocurrency space.”
The company plans to open a beta version of the platform to developers in about two months, enabling them to upload code representing their preferred trading strategies to the platform and begin developing track records of making or losing money. After perhaps six months to a year, as fund leaders’ records start to become clear, the company hopes to open the site to outside investors, letting them place investments with the funds of their choosing.
“To prevent short-lived strategies from being overrepresented, we will favor strategies that have been robust to different market conditions and have built a longer track record over time,” the founders write in a white paper.
Zyskind says the company may initially be required to limit access to trading to so-called qualified investors, who under federal securities regulations are generally people with annual incomes of $200,000 or at least $1 million in assets, considered to be enough that they can invest in riskier opportunities. Regulators have taken a somewhat cautious approach to letting rank-and-file investors dabble in cryptocurrency. The Securities and Exchange Commission is currently reviewing a ruling blocking the Winklevoss twins from launching an exchange-traded fund—that is, one in which investors can buy and sell shares similarly to how they buy and sell stock—focusing on bitcoin, amid concern that the wider bitcoin market is relatively unregulated and potentially subject to market manipulation.
“From a vision perspective, we would like to be able to enable the average Joes to be able to invest in these technologies as well,” says Can Kisagun, chief product officer at Enigma.
Right now, investors looking to experiment with more sophisticated trading strategies are often limited to using off-the-shelf, open source trading bots, Zyskind says.
“You have to get your hands in some existing and not well-documented open source projects,” he says. That can be a bit intimidating for investors, even those with a coding background, since a malfunction when trading can potentially be quite costly.
A previous project by the Enigma team sought to use a bitcoin-style blockchain and sophisticated cryptography to let consumers share confidential data with big companies, whether for surveys or for transactions like bank loans, on terms they could control. But the project was slow to gain traction with the big enterprise companies who’d need to participate to make the platform work, Zyskind says.
In Catalyst, Enigma plans to make various datasets available for use in automated trading decisions, from historic price information to analyses of the overall sentiment of news stories and social media posts about cryptocurrencies. The company plans to also invite users to create their own datasets and make them available—perhaps for a fee—to those setting up funds and looking for mathematical indicators of how and when to trade.
“Since the ecosystem surrounding crypto-markets is still in its early days, relevant data sources are scarce and fragmented,” write the Enigma founders in the white paper. “We plan to change the landscape, bringing it to the level of more mature financial markets.”
That, in turn, might help make the market more attractive both to would-be fund managers and to ordinary investors, not just tech-savvy crypto fans.
“I think we’re just at the beginning,” says Zyskind. “I don’t think any one of us knows how big it could be.”
The post is also available at Fast Company, the world’s leading progressive business media brand.