Data from the Cambridge Centre for Alternative Finance’s 2017 Global Cryptocurrency Benchmarking Study indicate that almost three quarters (72%) of large cryptocurrency exchanges now provide trading support for two or more cryptocurrencies.
Bitcoin is supported by all exchanges, while of the remaining 1,273 cryptocurrencies in existence, as of November 8, the most commonly traded are ether and Litecoin.
Study participants report cryptocurrency trading in 42 different national currencies and more than half (53%) of exchanges support national currencies other than the five global reserve currencies, although the market is dominated by the four national currencies US dollars, euros, yen and onshore renminbi.
Among the findings of the study was that, despite many cases of internal fraud and bankruptcies of centralized exchanges, peer-to-peer exchanges have yet to gain traction. Of the 51 exchanges surveyed, only two provide a decentralized marketplace for exchanging cryptocurrencies.
The cryptocurrency exchange community has watched eagerly as Wall Street investment banks and regulators have grappled with the implications of an explosion in interest. Some observers now believe products that straddle the worlds of cryptocurrency and regulated derivative exchanges are imminent.
Harpal Sandhu, CEO of Integral, suggests that cryptocurrency exchanges lag traditional FX exchanges in terms of speed, resilience and support, although he also expects new entrants to radically transform the services offered to traders.
“Client onboarding and [know your customer] processes vary widely depending on the regulatory regime of the exchange,” he says. “The biggest gap is the absence of an effective broker network supporting the liquidity pools. Most exchanges act as their own broker – which limits access and concentrates risk – and fees remain quite high by FX standards.”
Exchanges have had to become much more adept at handling the explosion of interest in cryptocurrency and the demands this interest has created, says Brad Bailey, research director in the securities and investments practice at Celent.
One of the areas of considerable interest to those watching developments in cryptocurrency trading from an institutional FX trading perspective is the relatively high level of fees charged to transact in the main cryptocurrencies.
“From a fee perspective, it is important to understand the details of the charges – whether they are levied by maker or taker fees, percentage of notional traded or transactional charges per X dollars of bitcoin traded,” says Bailey.
Integral’s Sandhu notes that in some cases exchanges charge bundle fees as high 0.25% for matching, clearing and settling. However, he is confident that fees will fall as the market becomes more efficient.
|Brad Bailey, Celent|
According to Celent’s Bailey, a growing number of investors are viewing cryptocurrencies as they would an asset such as gold, and are wondering if they should have it as part of their overall portfolio.
In this scenario, cryptocurrencies are largely misnamed, as more investors want to own them for their price appreciation than to spend them as they would other FX products.
“The moves in the price of bitcoin have generally been exploding to the upside, with momentary volatility spikes that can really move the price down,” he explains.
“The level of volatility is quite attractive to many types of traders and will continue until there is a clearer picture of how cryptocurrencies fit into the overall capital market landscape from a regulatory and product perspective.”
This landscape is changing by the day, but many in the market would like to see a clear path that would allow them to buy and sell cryptocurrencies in a fashion that mitigates the risks of government intervention, regulation and cyber security.
Another option for investors looking to speculate on the value of cryptocurrency is to participate in an initial coin offering (ICO), where issuers accept a cryptocurrency in exchange for a proprietary ‘coin’ or ‘token’. In most cases, investors will flip these coins as soon as they are launched on exchanges.
In September, the Financial Conduct Authority published a consumer warning about the risks of such offerings, noting that the digital token issued might offer no discernible value at all and describing ICOs as very high risk: speculative investments that should only be participated in by experienced investors who are prepared to lose their entire stake.
Dan Andersson, founder of LEOcoin, offers a more positive assessment.
“Since an ICO is accessible by small as well as large-scale investors, more people are able to participate in the launch of a new currency and share in the subsequent risk and reward associated with their level of commitment,” he concludes.