How are traditional market players responding to cryptocurrencies?
In the annals of history, 2017 will probably be noted for two things – it was the year that Donald Trump took office and it was the year the world took notice of cryptocurrencies. We don’t know how either phenomenon will play out in the long run but we do know that, in the meantime, both have far-reaching consequences.
One of the short-term implications of the rise of Bitcoin and other cryptocurrencies is that it has taken attention, and possibly volume, away from other markets. So, how have other markets been affected, and how are they reacting?
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Traders love volatility and it’s a fair assumption to think that many have moved at least some of their attention to the crypto world. Equity markets, in particular, are recording the lowest levels of volatility since the Vix index was introduced. Even before Bitcoin became a mainstream trading asset, many day traders were moving to longer time horizons.
Brokers that offer access to multiple markets on one platform are probably in the best position. They usually offer exposure to multiple asset classes via OTC derivatives. CFDs are a popular way for retail traders to get exposure to foreign exchange (forex), equities, indices, and now cryptocurrencies too.
Traders can also get exposure to multiple markets by using financial spread betting platforms. Traders who have been using these platforms can now easily jump across to the brand new crypto asset class. Because they already have their capital in a trading account, they don’t even need to open a new account and move money around. These types of platforms don’t actually give their clients direct ownership of cryptocurrencies but indirect access via a derivative contract.
Most retail forex brokers have moved to the CFD model over the last decade but those that still offer clients direct access to currencies may be losing out. Cryptocurrencies are a natural progression for forex traders because price moves are driven by flow more than by fundamentals.
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It’s not as easy for stock brokers. Their clients have direct stock holdings in their accounts and giving them access to cryptocurrencies would entail going into a new type of business. It was recently reported that cryptocurrency exchange Coinbase now has more client accounts than Charles Schwab. Those accounts are much smaller but their turnover is probably much higher. Stockbrokers must surely be watching and wondering how much trading activity they are losing out on. This will no doubt be a question brokers will be asking themselves in 2018, and we are sure to see their business models evolving.
Interesting opportunities are emerging for those that provide liquidity, technology, research and other services to financial markets. For any business in those segments, the crypto markets must surely be where the growth is at the moment. Some of these businesses can bring decades of experience to the new market, and plenty of investment capital has been raised by initial coin offerings. In fact, the figure stands at $4 billion in 2018 alone.
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An example is B2BX which is bringing its experience connecting Forex brokers to the crypto world. The company recently raised €5 million to create an exchange aggregator for the cryptocurrency market. The aggregator will allow crypto exchanges to source liquidity from one another. This will become an essential service if institutional investors enter the market.
It’s clear that the cryptocurrency phenomenon is providing challenges and opportunities to the companies that service the world’s trading markets.
As 2018 kicks off, all of these companies will no doubt be debating the merits of entering a market with a future that no one can forecast.
By Anthony Dennison, freelance writer
