The lines between cryptocurrencies and traditional asset classes are blurring as established Wall Street players make trading digital assets a part of their core business – and Bitcoin-native companies enter mainstream markets.
The entry of institutional investors into the $1.3 trillion digital asset market has seen the influence of big banks and professional traders grow. As a result, the relationship between the price of mainstream assets like stocks and bonds and crypto has tightened.
But so far, the majority of these mainstream investors can only trade Bitcoin derivatives rather than spot contracts, which has concentrated Wall Street’s influence on futures markets and over-the-counter (OTC) contracts such as deliverable forward’.
And this focus on derivatives has intensified exchanges’ competition for a growing slice of the digital asset world.
The influence of professional traders on the market is already being felt, says Adam Farthing, chief risk officer for Japan at crypto-specialized market maker B2C2.
In recent weeks, the cryptocurrency markets experienced one of their biggest shakeouts ever after Tether, a leading stablecoin that was supposed to be priced in line with the US dollar, broke its peg to the currency. This sent a reverberation through the digital asset markets, wiping out billions of dollars worth of trading positions.
Bitcoin and Ethereum, the two largest crypto tokens by market value, have posted double-digit losses since the beginning of the month.
However, Farthing notes that price swings in crypto futures have been much more muted than elsewhere, and shifts between exchanges — which can create arbitrage opportunities — have been less than in previous episodes of market turbulence.
“With all the doom and gloom surrounding the crypto markets, it’s worth noting that the futures markets are beginning to behave in a more mature manner,” says Farthing.
Recent volatility has also propelled crypto futures contract trading to record highs on the Chicago Mercantile Exchange (CME) as professional traders seek to confine their digital asset trading to a highly regulated marketplace.
But retail clients trade even larger amounts of futures contracts per day on offshore exchanges, which are less tightly 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-agreed time frame while investing only a small fraction of the value of their trades up front. However, this ability to leverage trades amplifies the outcome, which means the magnitude of potential losses is much greater.
For highly regulated institutions like banks, futures 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 promoting more professional crypto futures trading, the exchanges are racing to become the largest in this market.
Competition between exchanges for a piece of the digital coin market has gotten tougher than ever – even as cryptocurrency markets experience one of their biggest meltdowns ever and fears mount that an extended period of low activity could hurt trading revenues.
“While the number of exchanges that the crypto market can support is not that limited, it is likely that a few key players will emerge over time,” predicts Nicky Maan, managing director of Spectrum Markets, which offers securitized crypto derivatives to investors .
“I am assuming that we will see significant growth [on exchanges] compared to OTC over the next five years,” he adds.
Traditional exchanges are also keen to grab a piece of the lucrative crypto trading market, after years of watching their startup digital asset counterparts reap attractive rewards.
Cboe and CME were the first to launch futures contracts on Bitcoin in 2017. Now the Swiss stock exchange SIX and Eurex also offer types of derivatives.
At the same time, specialized crypto exchanges are slowly making their way into the heavily regulated US derivatives markets. They do this, among other things, to satisfy demanding retail customers who want to trade products and contracts across all markets. But even the leading crypto exchanges are half eyeing entry into the traditional professional markets.
In recent months, several crypto exchanges have taken over small traditional exchanges – to accelerate their push into conventional markets, particularly in derivatives.
New crypto exchanges are also on the rise. According to Coinmarketcap, a data website, there are now 526 cryptocurrency trading exchanges and some newer market entrants have gained strength, particularly 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 right around the holiday season and today we have over $2 billion in bitcoin trading volume, the same amount as Coinbase,” said Tom Farley, chief executive of Bullish’s special purpose vehicle, which is dedicated to the IPO will go later this year.
And some of the ideas that crypto exchanges are bringing to traditional markets are innovative. One is trading 24 hours a day, seven days a week – a schedule that’s normal for computerized digital markets but alien even to forex trading, which only takes place 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 unnerved futures market loyalists by submitting a proposal to US regulators that could oust brokers from the markets.
He argues that risk management in all markets should be done by computers, just like crypto. This proposal has not gone over well with brokers as it would give them virtually no role. But the Commodity Futures Trading Commission (CFTC), the US regulator of derivatives markets, has launched a consultation on the proposal that could result in big banks like Goldman Sachs being banned from trading.
The CFTC is considering allowing Bankman-Fried to sell leveraged crypto derivatives to retail investors and transact their trades directly, eliminating intermediary financial brokers from the process.
With crypto, this is already the norm as most exchanges also act as brokers. Not only do they match trades, but they also manage their clients’ positions — raising some unease among regulators about potential conflicts of interest.
Bankman-Fried’s idea already has some fans, although regulators have yet to decide if they agree with his proposal.
Chris Perkins, president of investment management company CoinFund, is in favor because he came up with the idea.
When he worked at US bank Citi, he ran one of the largest futures intermediaries in the world — exactly the kind of business that Bankman-Fried’s proposal could shut down. “I’ve spent my career building one of the most prominent regulated derivatives companies in the world,” said Perkins. “I was the mediator.”
But after joining the cryptocurrency world, Perkins changed his mind. Intermediaries, he believes, should go. “I’m gonna be honest with myself and say, you know what: [Bankman-Fried] it’s right.”
Whether regulators will agree with Perkins’ conclusion remains to be seen.
Source: Crypto News Austria