The boundaries between cryptocurrencies and traditional asset classes are increasingly blurred, as established players on Wall Street include trading in digital assets in their core businesses — and bitcoin-native companies advance into traditional markets.
With the arrival of institutional investors to the US$1.3 trillion (R$6.24 trillion) digital asset market, the influence of large banks and professional traders has increased. As a result, the relationship between the price of major assets such as stocks and bonds and cryptocurrencies has shrunk.
Until now, though, most of these established investors can only trade bitcoin derivatives, not cash contracts, which has focused Wall Street’s influence on futures markets and over-the-counter (OTC) contracts as “non-deliverable in the future”.
And this focus on derivatives has intensified competition for exchanges for an ever-increasing share of the world of digital assets. The influence of professional traders in the market is already noticeable, says Adam Farthing, risk director for Japan at market maker specializing in cryptocurrencies B2C2.
Over the past few weeks, cryptocurrency markets have had one of the biggest shake-ups ever after Tether, a leading stablecoin that is expected to be valued in line with the US dollar, broke its peg to the currency. This sent ripples through the digital asset markets, wiping out billions of dollars in trading positions.
Bitcoin and ethereum, the two biggest crypto tokens by market cap, have posted double-digit losses since the beginning of the month.
However, Farthing notes that price swings were much smoother in cryptocurrency futures than elsewhere, and shifts between exchanges – which can give rise to arbitrage opportunities (profits made from the rate differential) – were smaller. than in previous moments of market turmoil.
“With all the chaos surrounding cryptocurrency markets, it’s worth noting that futures markets are behaving more and more maturely,” says Farthing.
Recent volatility has also caused record cryptocurrency futures trading on the CME (Chicago Mercantile Exchange) as professional traders seek to limit their trading in digital assets to a highly regulated market.
But retail clients trade even larger volumes of futures contracts per day on offshore exchanges, which are less regulated. This includes 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 reducing upfront only a small fraction of the value of their trades. However, this ability to leverage trades amplifies the result, which means that the scale of potential losses is much greater.
For highly regulated institutions such as banks, futures are also easier to manage from a credit, compliance and legal perspective because they do not involve physical delivery of the underlying asset.
With these advantages now fueling more professional cryptocurrency futures trading, exchanges are racing to become the biggest in this market.
Competition among exchanges for a share of the digital currency market has become fiercer than ever — even as cryptocurrency markets experience one of their biggest crashes ever and fears rise that a prolonged period of low activity could hurt. the recipes.
“While there is no hard cap on the number of exchanges the cryptocurrency market can support, it is likely that some major players will emerge over time,” predicts Nicky Maan, chief executive of Spectrum Markets, which offers securitized cryptocurrency derivatives to investors. investors.
“I hope we have significant growth [nas corretoras] compared to OTC over the next five years”, he adds.
Traditional exchanges are also keen to get a slice of the lucrative cryptocurrency trading market, as they have spent years watching their peers who are new to digital assets reap enticing rewards.
Cboe and CME were the first to launch bitcoin futures contracts in 2017. Now Switzerland’s SIX exchange and Eurex are also offering types of derivatives.
At the same time, specialized cryptocurrency exchanges are slowly entering the highly regulated US derivatives markets. They are doing this in part to satisfy demanding retail customers who want to market products and contracts that span all markets.
But major cryptocurrency exchanges are also looking to enter traditional professional markets. In recent months, several cryptocurrency exchanges have made acquisitions of small traditional exchanges to accelerate their entry into mainstream markets, particularly in derivatives.
New cryptocurrency exchanges are also making inroads. There are now 526 cryptocurrency trading brokers, according to data site Coinmarketcap, and some recent entrants have been gaining traction, especially those targeting professional investors.
The Bullish platform, backed by several billionaire hedge fund owners, has had a promising start since late last year. “We launched Bullish around Christmas time, and today we have more than $2 billion in bitcoin traded volumes, the same as Coinbase,” says Tom Farley, chief executive of Bullish’s special-purpose vehicle, which he will use to float. on the Stock Exchange later this year.
And some of the ideas that cryptocurrency exchanges are bringing to traditional markets are innovative. One is 24/7 trading – a normal schedule for computerized digital markets, but strange even for foreign exchange trading, which operates only five days a week.
Other encryption initiatives are more controversial. Sam Bankman-Fried — billionaire owner of FTX, one of the world’s largest cryptocurrency exchanges — rocked the futures market by making a proposal to US regulators that could eliminate brokers from the markets.
He argues that risk management should be done by computers in all markets, just as it is with cryptocurrency. This suggestion did not go down well with brokers, as it would not actually give them any paper at all. However, the Commodity Futures Trading Commission (CFTC), the US derivatives market regulator, has launched a consultation on the proposal, which could cause major banks such as Goldman Sachs to stop trading.
The CFTC is considering whether to allow Bankman-Fried to sell leveraged cryptocurrency derivatives to retail investors and settle their trades directly, eliminating intermediary financial brokers in the process.
In cryptocurrencies, this is already the norm, as most traders also act as brokers. Not only do they combine deals, they manage their clients’ positions, causing some unease among regulators about potential conflicts of interest.
Bankman-Fried’s idea already has some fans, although regulators have yet to decide whether they agree with his suggestion.
Chris Perkins, president of investment management firm CoinFund, is in favour, having accepted the idea.
He ran one of the world’s largest futures brokerage firms when he worked at US bank Citi — just the kind of deal that Bankman-Fried’s proposal could close.
“I’ve spent my career building one of the most prominent regulated derivatives companies in the world,” explains Perkins. “I was the go-between.”
But after entering the world of cryptocurrencies, Perkins changed his mind. The middlemen must go, he believes. “I’ll be honest with myself and say you know what: [Bankman-Fried] that’s right.”
It remains to be seen whether regulators will agree with Perkin.
Translated by Luiz Roberto M. Gonçalves
