The future of crypto trading is out

The lines between cryptocurrencies and traditional asset classes are increasingly blurring as Wall Street established players make trading digital assets their core business – pushing bitcoin-native firms into traditional markets.

The arrival of institutional investors in the $1.3 billion digital asset market has led to greater influence from major 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 incumbent investors can only trade bitcoin derivatives, rather than cash contracts, which has concentrated Wall Street’s influence on futures and over-the-counter contracts. non-deliverable forward contracts.

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

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

In recent weeks, the 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. This caused ripples through the digital asset markets, wiping out billions of dollars in trading positions.

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

Farthing notes, however, that price swings have been much more moderate in crypto futures than elsewhere, and inter-exchange dislocations — which can give rise to arbitrage opportunities — have been less than in episodes.

“With all the doom and gloom surrounding crypto markets, it’s worth noting that futures markets are becoming more mature,” Farthing said.

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

But retail clients trade even higher volumes 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 predetermined time frame, while only depositing a small portion of the value of their trades into the market. However, this ability to profit from trades amplifies the outcome, meaning the magnitude of potential losses is much greater.

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

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

Inter-exchange competition for some of the digital coin market has become fiercer than ever – even as the cryptocurrency markets are experiencing one of their biggest meltdowns, and fears are growing that a prolonged period of low activity could reduce commercial income.

“While there isn’t much of a hard limit on how many exchanges the crypto market can support, it’s likely that some big players will emerge over time,” Spectrum Markets Managing Director Nicky Maan predicts that secure offers crypto. derivatives. to investors.

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

Traditional exchanges are also eager to get a slice of the lucrative crypto trading market, after years of looking to their startup counterparts in digital assets reaping 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.

For years, traditional exchanges have watched their digital asset budding peers 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, among other things, to satisfy demanding retail customers who want to market products and contracts for all markets. But even major crypto exchanges have half an eye on entering traditional professional markets.

In the past few months, several crypto exchanges have taken over smaller, traditional exchanges to accelerate their march into conventional markets, especially in derivatives.

New crypto exchanges are also making their appearance. There are now 526 exchanges for cryptocurrency trading, according to coinmarketcap, a data website, and some recent entrants have gained momentum, 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 trading volume, the same amount as Coinbase,” said Tom Farley, General Manager of Special Purpose Vehicle at Bullish, which will use it to float on the exchange. . Later this year.

And some of the ideas crypto exchanges are bringing to traditional markets are innovative. One is 24/7 trading – a normal schedule for automated digital markets, but even strange for currency trading, which only works 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 the futures market’s stalwarts with a proposal to US regulators that could wipe brokers off the markets.

He argues that risk management should be done by computers in all markets, just like crypto. This suggestion was not well received by brokers as it would basically 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 exclude major banks such as Goldman Sachs from trading.

The CFTC is considering allowing Bankman-Fried to sell leveraged crypto derivatives to retail investors and settle their trades directly, eliminating financial intermediaries 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 concern among regulators about the possibility of conflicts of interest.

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

Chris Perkins, president of investment management firm CoinFund, is supportive and has 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 company that could ditch Bankman-Fried’s proposal. “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 middlemen, he thinks, should leave. “I’ll 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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