One of Chicago’s largest high-speed traders has taken a central role in the bitcoin market, stepping into the vacuum created by Wall Street’s hesitant response to the booming investor interest in digital currencies.
DRW Holdings LLC uses quantitative models to buy and sell bitcoin, for its own account and for use as a market maker—firms that grease the wheels of finance by buying, selling and quoting prices. Cumberland, DRW’s digital-currency unit, says it has traded more than $20 billion worth of bitcoin, ethereum and other cryptocurrencies in the past year. That makes it one of the top market makers in the sector, traders said.
Bitcoin, invented less than a decade ago, is up more than 900% this year and recently surpassed $9,000 for the first time. It was trading at $9,338.20 late Sunday. The value of all the bitcoins in existence is about $157 billion, more than the market capitalization of Caterpillar Inc.
Despite those gains, the market for bitcoin is plagued by extreme volatility and an uncertain regulatory status, factors that have limited the interest of many Wall Street firms. DRW started its bitcoin desk more than three years ago, but banking giants such as Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are just now considering how they will handle bitcoin trading.
“They were very early adopters, and they’ve got a massive lead over everyone else,” said Brian Kelly, founder of BKCM Digital Asset Fund, a crypto hedge fund that trades regularly with Cumberland.
Founded in 1992, DRW employs more than 800 people and trades on exchanges around the world. About a quarter of its business involves high-frequency trading—running automated strategies over ultrafast network connections—although other strategies can involve trades that last for months or even years.
Based in a sleek Chicago skyscraper, DRW’s offices feel more like those of a Silicon Valley tech company than a Wall Street bank, with a casual dress code and weekly visits from a meditation teacher.
As a nonbank firm that doesn’t manage money for outside investors, DRW is less subject to the regulatory questions looming over bitcoin than Goldman and other major banks.
Donald Wilson Jr., the firm’s founder and chief executive, has clashed with regulators over civil allegations that DRW manipulated an interest-rate contract in 2011. The Commodity Futures Trading Commission sued him and his company over the allegations, in a case that went to trial last year.
Mr. Wilson and DRW have rejected the allegations, saying their trading strategy was lawful and slamming the agency’s legal arguments as flawed. Unlike most traders facing a CFTC manipulation case, they refused to settle. The judge has yet to reveal his verdict.
DRW doesn’t report financial results, and it declined to say how much money its crypto unit makes. Mike Komaransky, a former partner who helped build Cumberland, retired from the company in June at age 38. He drew attention in August when he put his Florida mansion on sale for $6.5 million and offered to accept payment in bitcoin. The house is still on sale, Mr. Komaransky said.
DRW set up Cumberland in 2014, the same year a theft of more than $470 million worth of bitcoin from Mt. Gox, once the world’s largest bitcoin exchange, and other troubles caused the digital currency to lose more than half its value.
Cumberland was among the biggest buyers of bitcoins seized from Ross Ulbricht, founder of the underground online drug bazaar Silk Road, who is now serving a life sentence after being convicted of narcotics trafficking, conspiracy to launder money and other crimes. The unit bought about 70,000 such bitcoins in auctions conducted by U.S. and overseas authorities, it says.
Mr. Wilson thinks bitcoin’s reputation as a tool for criminals is undeserved. “A lot of shady people have done a lot of bad things with dollars,” he said in an interview.
Initially, DRW considered focusing on bitcoin mining, a process in which computers solve complex math problems to generate new bitcoins. That led the firm to call its crypto unit Cumberland Mining & Materials LLC—a name borrowed from the Grateful Dead song “Cumberland Blues,” about a hardworking miner.
Cumberland mines Zcash, an upstart digital currency whose backers say it has better privacy protections than bitcoin. Cumberland is tight-lipped about its mining operation, saying only that it is located in the U.S. near a low-cost source of hydroelectric power. Cheap electricity is essential for cryptocurrency mining to be profitable.
The unit also runs automated trading “bots” that try to eke out profits from differences between the prices of digital currencies on different exchanges.
But Cumberland’s fastest-growing business is market-making, especially in big-ticket trades of at least $100,000 and ranging into the millions of dollars. Its team of 15 in Chicago, London and Singapore receive inquiries around the clock from crypto funds, wealthy bitcoin investors and other clients seeking to buy or sell digital currencies.
Bobby Cho, head of over-the-counter trading at Cumberland, expects banks will eventually enter the market. “Bitcoin is a very polarizing word,“ he said. ”Regardless of whether you love it or hate it, if you have an opportunity to cross-sell it to your client, you want to take it.”
Mr. Wilson, who started his career in the CME’s eurodollar options pit in 1989, acknowledges that bitcoin is a risky business. Unlike many crypto enthusiasts, he says the jury’s still out on whether bitcoin will succeed.
“Even now, I look at it as an experimental thing,” Mr. Wilson said. “Who knows if it will become a viable currency?”