The lines between cryptocurrency and traditional asset classes are increasingly blurring as Wall Street players make digital asset trading part of their core business — and local companies squeeze bitcoin into traditional markets.
The access of institutional investors to the $1.3 billion digital asset market has amplified the influence of major banks and professional traders. As a result, the relationship between the price of traditional assets, such as stocks and bonds, and cryptocurrencies has tightened.
But, so far, the majority of these established investors can only set Bitcoin derivatives, rather than cash contracts, which has focused Wall Street’s impact on futures and over-the-counter contracts. Non-deliverable futures contracts.
This focus on derivatives has intensified competition from exchanges for a growing part of the digital asset world.
The influence of professional traders on the market is already noticeable, says Adam Farthing, risk manager for Japan at crypto market maker B2C2 specialist.
Over the past few weeks, the cryptocurrency markets experienced one of their biggest earthquakes after Tether, a leading stablecoin expected to be offered in line with the US dollar, broke its bond. This created ripples in the digital asset markets, eliminating billions of dollars in trading positions.
Bitcoin and Ethereum, the two largest cryptocurrency by market cap, have posted double-digit losses since the beginning of the month.
However, Farthing notes that price volatility has been much lower in crypto futures than elsewhere, and that turmoil between exchanges – which can lead to arbitrage opportunities – has been lower than in previous episodes of market turmoil.
“With all the gloom surrounding the cryptocurrency markets, it is worth noting that the futures markets are becoming more mature,” says Farthing.
The latest urgency has also pushed CME futures trading to record levels, as professional traders seek to limit digital asset trading to a highly regulated market.
But retail clients trade even larger quantities of futures contracts daily on offshore exchanges, which are not 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 predetermined time frame, while depositing only a small portion of the value of their trades into the market. However, this ability to profit from trades amplifies the outcome, which means that 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 the physical delivery of the underlying asset.
With these advantages now fueling more professional cryptocurrency futures trading, exchanges are racing to become the most prominent in this market.
The competition between exchanges for a slice of the cryptocurrency market is fiercer than ever — even as the cryptocurrency markets suffer one of the biggest crashes, and fears are growing that a prolonged period of low activity could reduce business returns.
“While there is not much of a limit on the number of exchanges the crypto market can support, it is likely that a few major players will emerge over time,” predicts Nikki Mann, general manager of Spectrum Markets, which offers secure crypto derivatives. for investors.
“I expect big growth [on exchanges] versus OTC over the next five years, he adds.
Traditional exchanges are also keen to have a slice of the lucrative cryptocurrency trading market, having spent years watching their emerging peers in digital assets reap attractive rewards.
Cboe and CME were the first to launch bitcoin futures in 2017. Today, the Swiss exchange SIX and Eurex also offer types of derivatives.
Meanwhile, niche cryptocurrency exchanges are slowly penetrating heavily regulated US derivatives markets. They do this in part to satisfy demanding retail customers who want to market products and contracts that span all markets. But the major crypto exchanges also have half an eye on entering the traditional professional markets.
Over the past few months, several crypto exchanges have made acquisitions of smaller traditional exchanges – accelerating their push into traditional markets, especially in derivatives.
New cryptocurrency exchanges are also making their way. There are now 526 cryptocurrency exchanges, according to coinmarketcap, a data website, and some newcomers are gaining ground, especially those aimed at professional investors. Bullish, which is backed by a number of billionaire hedge fund owners, has had a promising start since late last year.
“We launched Bullish over Christmas and today we have over $2 billion in bitcoin trading volumes, which is the same amount as Coinbase,” said Tom Farley, general manager of Bullish’s special purpose vehicles, which will be used to float the exchange. later this year.
Some of the ideas that cryptocurrency exchanges are bringing to traditional markets are innovative. The first is 24/7 trading – a normal schedule for computerized digital markets, but foreign trading even for currency trading, which only works five days a week.
Other encryption initiatives are more controversial. Sam Bankman-Fried – the billionaire owner of FTX, one of the largest cryptocurrency exchanges in the world – shook the futures market leaders with a proposal to US regulators that could wipe out the servants from the markets.
He argues that risk management should be done by computers in all markets, just as it is with cryptocurrencies. This suggestion was not well received by the courtiers because in fact it would not give them any role. However, the Commodity Futures Trading Commission (CFTC), the regulator of the US derivatives market, has launched an advisory on the proposal, which could see major banks such as Goldman Sachs excluded from transactions.
The Commodity Futures Trading Commission (CFTC) is considering allowing Bankman-Fried to sell leveraged crypto-derivatives to retail investors and settle their trades directly, barring financial intermediaries from the process.
In cryptocurrencies, this is already the norm because most exchanges are also about entourage. It is not only a transaction messenger, but manages the positions of its clients, which causes some concern among regulators about the potential for conflicts of interest.
The idea of Bankman-Fried is already gaining fans, although organizers have not yet decided whether they will accept his proposal.
Chris Perkins, president of investment management firm CoinFund, is supportive, having embraced the idea.
He ran one of the world’s largest futures brokerages when he was at Citi, the US bank – exactly the kind of business a Bankman-Fried proposal could close. “I have spent my career building one of the largest regulated derivatives companies in the world,” Perkins says. “I was the mediator.”
But after joining the cryptocurrency world, Perkins changed his mind. He thinks psychics should leave. “I’ll be honest with myself and say you know what: [Bankman-Fried] it’s correct.
It remains to be seen whether regulators agree with Birkin’s conclusion.
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