The Future Of Crypto Trading Is Out

The lines between cryptocurrencies and traditional asset classes are increasingly blurring as established players on Wall Street make trading digital assets part of their core business – and bitcoin-native companies push on traditional markets.

The arrival of institutional investors in the $1.3 billion digital asset market has led to an increase in the influence of big banks and professional traders. As a result, the relationship between the price of traditional assets, such as stocks and bonds, and crypto has tightened.

But, until now, the majority of these established investors can only trade bitcoin derivatives, rather than cash contracts, which has concentrated Wall Street’s influence on futures and over-the-counter contracts. over-the-counter (OTC), such as ‘non-deliverable forward’ contracts.

And this focus on derivatives has intensified competition from exchanges for a growing part of the digital asset world.

The influence of professional traders in the market is already noticeable, says Adam Farthing, director of risk for Japan at the specialist crypto market maker B2C2.

Over the past few weeks, cryptocurrency markets experienced one of their biggest earthquakes after Tether, a leading stablecoin expected to price in line with the US dollar, broke its bond. currency peg. This sent ripples through digital asset markets, wiping out billions of dollars in trade positions.

Bitcoin and Ethereum, the two largest crypto tokens by market value, have posted double-digit losses since the start of the month.

However, Farthing notes that price swings have been much more subdued in crypto futures than elsewhere, and dislocations between exchanges – which can give rise to arbitrage opportunities – have been fewer than in episodes. precedents of market turbulence.

“With all the doom and gloom around the crypto markets, it’s worth noting that the futures markets are behaving more and more in a mature fashion,” says Farthing.

Recent volatility has also pushed crypto futures trading on the Chicago Mercantile Exchange (CME) to record highs, as professional traders seek to limit their digital asset trading to a highly regulated market.

But retail clients trade even larger volumes of futures contracts per day on offshore exchanges, which are less strictly regulated. These include FTX, Binance and OKex.

Derivatives, such as futures and options, are attractive because they allow investors to bet on price movements within a pre-determined time frame, while depositing only a small fraction of the value of their trades into the market. ‘advance. However, this ability to leverage trades amplifies the outcome, meaning the magnitude of potential losses is much greater.

For highly regulated institutions like banks, futures contracts are also easier to manage from a credit, compliance and legal perspective, as they do not involve physical delivery of the underlying asset.

With these advantages now fueling the more professional trading of crypto futures, exchanges are racing to become the most prominent in this market.

Competition among exchanges for a slice of the digital coin market has become fiercer than ever – even as cryptocurrency markets experience one of their biggest meltdowns, and fears grow that a prolonged period of low activity could reduce commercial income.

“While there is not so much of a hard limit on the number of exchanges the crypto market can support, it is likely that a few major players will emerge over time,” predicts Nicky Maan, Managing Director from Spectrum Markets, which offers secure crypto derivatives. to investors.

“I expect significant growth [on exchanges] versus OTC over the next five years,” he adds.

Traditional exchanges are also keen to get a slice of the lucrative crypto trading market, having spent years watching their startup counterparts in digital assets reap attractive rewards.

Cboe and the CME were the first to launch bitcoin futures in 2017. Today, the Swiss exchange SIX and Eurex also offer types of derivatives.

Traditional exchanges have spent years watching their start-up peers in digital assets reap the rewards © Christopher Dilts / Bloomberg

At the same time, specialized crypto exchanges are slowly penetrating the highly regulated US derivatives markets. They do this in part to satisfy demanding retail customers who want to market products and contracts covering all markets. But major crypto exchanges also have half an eye on entering traditional professional markets.

Over the past few months, several crypto exchanges have made acquisitions of smaller, traditional exchanges – to accelerate their push into conventional markets, especially in derivatives.

New crypto exchanges are also making inroads. There are now 526 exchanges for cryptocurrency trading, according to coinmarketcap, a data website, and some recent entrants have gained strength, especially those targeting professional investors. Bullish, the platform backed by a number of billionaire hedge fund owners, has had a promising start since late last year.

“We launched Bullish around Christmas and today we have over $2 billion in bitcoin traded volumes, the same amount as Coinbase,” said Tom Farley, General Manager of Special Purpose Vehicle at Bullish, which it will use to float on the stock exchange. Later this year.

And some of the ideas that crypto exchanges are bringing to traditional markets are innovative. One is 24/7 trading – a normal schedule for computerized digital markets, but foreign even to currency trading, which only operates five days a week.

Other crypto initiatives are more controversial. Sam Bankman-Fried — billionaire owner of FTX, one of the world’s largest crypto exchanges — has rocked futures market stalwarts with a proposal to US regulators that could wipe brokers out of the markets.

He argues that risk management should be done by computers in all markets, just like it is with crypto. This suggestion was not well received by brokers since it would in fact give them no role. However, the Commodity Futures Trading Commission (CFTC), the US derivatives market regulator, has launched a consultation on the proposal, which could see major banks such as Goldman Sachs excluded from transactions.

The CFTC is considering allowing Bankman-Fried to sell leveraged crypto derivatives to retail investors and settle their trades directly, eliminating middleman financial brokers from the process.

In crypto, this is already the norm as most exchanges also act as brokers. Not only do they match trades, but they manage their clients’ positions, causing some unease among regulators about the potential for conflicts of interest.

Bankman-Fried’s idea already has fans, although regulators have yet to decide whether they agree with his suggestion.

Chris Perkins, president of investment management firm CoinFund, is supportive, having embraced the idea.

He ran one of the largest futures brokerage firms in the world when he worked at Citi, the US bank – which is exactly the kind of business Bankman-Fried’s proposal could shut down. “I’ve spent my career building one of the largest regulated derivatives companies in the world,” says Perkins. “I was the middleman.”

But, after joining the cryptocurrency world, Perkins changed his mind. The intermediaries, he thinks, should leave. “I’m going to be honest with myself and say you know what: [Bankman-Fried] is right.”

Whether regulators agree with Perkin’s conclusion remains to be seen.

Video: Cryptocurrencies: How Regulators Lost Control

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