Current analysis shows that global sales in cryptocurrency trading have risen sharply and will continue to gain importance. Banks and stock exchanges should invest in blockchain technologies to occupy this future market.
A turning point is looming in the cryptocurrency business. After the storm and stress years with enormous price fluctuations, private investors in particular traded on unregulated online marketplaces, an era of professionalization is beginning. Institutional investors are pushing the further development of Bitcoin and similar digital means of payment towards an independent asset class. Current market analysis by the management consultancy Bain & Company shows how this change is taking place.
In the past year, only 20 percent of crypto transactions were accounted for by the marketplaces, mainly used by private investors. The over-the-counter (OTC) business, dominated by institutional investors, already accounted for 35 percent of trading. Three years earlier, it had been just 5 percent. The market for derivatives developed even more dynamically: in 2020, it accounted for 45 percent of the total trading volume.
Professional investors preferred OTC trading mainly because of the greater flexibility. They increasingly used derivatives to protect themselves against the continuing inefficiencies and high volatility in the market.
High Growth Momentum In B2B Business
A new asset class is emerging, with institutional investors committing billions of dollars. This also shows a breakdown of sales by market participants. After that, B2C business – from the buyer of a single digital currency unit to wealthy day traders – still accounted for half of all sales. The decisive reason for the large share of turnover compared to the trading volume lies in the significantly higher fees that private investors pay for transactions. The pure B2B business between professional trading companies, brokers, banks, asset managers, and other institutional players already accounted for around 30 percent in 2020.
The study’s authors are convinced that the B2B business, in particular, will thrive. Institutional investors would position themselves in the market and expect a high-performance infrastructure and an offering at the level of classic asset classes.
Opportunities For Financial Service Providers
The opportunities that arise for market makers, brokers, asset managers, and other financial service providers are correspondingly diverse. The spectrum ranges from ensuring highly liquid, cost-effective trading to providing a secure infrastructure for custody and launching crypto funds.
The sales potential of a complete crypto value chain is many times higher than what is in retail. A decisive advantage for established financial service providers is that they trust institutional investors. With rapid standardization, they could lower the barriers to entry for large customers and limit risks and volatility with appropriate products.
Fast Action Necessary
A prerequisite for the emergence of futures markets is the development of new regulations and the further development of technology. In particular, the energy consumption of cryptocurrencies has been criticized in many places. However, with the further development of systems such as Ethereum, everything is now being done to reduce the power consumption for individual blockchain transactions. At the same time, state supervisory authorities worldwide are creating the necessary framework for the professionalization of the crypto market.
In many places, this has created the basis for expanding the crypto market beyond the previously dominant trade. The blockchain’s primary technology opens up the possibility of transparently and securely mapping transactions in other asset classes such as real estate or private equity. There are further options in the future in the provision of financial services in decentralized networks.
However, hurry is required. Blockchain technology has the potential to change the entire financial market fundamentally. Banks, stock exchanges, and other financial service providers should build up know-how as quickly as possible and occupy this future market.