THETRADETECH DAILY news
THE OFFICIAL NEWSPAPER OF TRADETECH 2022
Crypto
Institutional adoption of digital assets is growing rapidly , but the liquidity landscape remains fragmented
A NEW SURVEY FINDS THAT ALTHOUGH INSTITUTIONAL CRYPTO TRADING IS ON THE RISE , THE FRAGMENTED NATURE OF AVAILABLE VENUES REMAINS A CHALLENGE .
With current crypto values exceeding $ 2 trillion , the market for digital assets is surging and institutional interest is rapidly increasing . A new report from PwC , in partnership with the Alternative Investment Management Association ( AIMA ) and Finery Markets – which bills itself as the first global crypto-native multi-dealer platform – suggests that we could finally be seeing the first evidence of mainstream institutional adoption .
However , with numerous different digital assets to choose from and ( according to Coin Market Cap ) over 300 exchange platforms to trade through as of January 2022 , the key question is where – given the sophisticated requirements of institutional market participants – is best to execute your trades .
“ A client ’ s choice of digital asset execution venue may be influenced by the offering and acceptance of fiat and cryptocurrency , the reputation of the exchange in an already polarised market , and the costs associated with the transaction and the market prices that are achieved ,” said PwC .
Centralised exchanges ( CEXs ) such as Binance ( the most popular centralised execution venue among the 77 buy-side participants surveyed ), Kraken and Coinbase are strong favourites , due in large part to the security and liquidity they offer , the report noted . An overwhelming majority of trading ( more than 90 % of participants , according to PwC ) currently occurs via CEXs , which leads to lower liquidity risks and narrows the bid-ask spread for a more accessible market , but there are also downsides , including potential for hacking attacks and the perception that they are often not built to handle the scale of large transactions that institutional players are looking for
Decentralised exchanges ( DEXs ) are another option . These mitigate the hacking issue because they don ’ t exist on an exchange , so from a security perspective , the exchange of digital assets is less prone to an attack . However , a notable drawback of decentralised exchanges is their lower liquidity and the risk of market manipulation .
“ The keywords here are miners extracting value , front runners and automated market-makers . In a nutshell , fluctuations in prices and
execution times in the digital asset landscape allow the validators of blockchains to interfere with the orders that are made public ,” explained the report .
There is also a risk that large-volume DEX orders could also face hacks , while another concern is that the emphasis on privacy and lack of transparency could make essential due diligence impossible . Around a third of participants currently trade on DEXs , according to the report , with the most frequently used platforms being Uniswap , SushiSwap and 1inch .
OTC venues are emerging as an increasingly popular alternative , as they allow investors to trade high volumes at a pre-agreed price . However , they are less efficient than exchanges – when a party submits an order , they need to wait for a counterparty to engage , which can delay execution , while the lack of a delivery versus payment mechanism means there is a risk of a party defaulting . Among the institutionals that trade with OTC desks ( which accounted for around half the survey participants ), the most popular counterparty is B2C2 , followed by Cumberland , Genesis Trading , Galaxy digital , BlockFills and DV Chain .
Finally , smart order routing ( SOR ) is also gaining traction among institutional investors , using an algorithm to determine the best price for the transaction . Through a pre-determined scope of trading venues , the SOR seeks to achieve the most favourable trading condition . The method is appealing in terms of best execution because it can access several trading venues simultaneously . This means the range of digital assets traded is broader , and liquidity can be aggregated – a distinct advantage in such a fragmented landscape . However , the method is highly complex which limits take-up even among institutional players .
“ When choosing an exchange , the respondents seem to place importance on execution and liquidity quality ,” said the report . “ The second most important factor is the assets an exchange supports . Rounding off the top three , regulation and jurisdiction reputation is the final factor in the choice of exchange .”
Interestingly , fees and commissions came in fourth place , suggesting that players are currently willing to pay more in transaction fees if the exchange has other features they want , such as a wide range of assets , best execution capabilities , and legal certainty .
In summary , institutional trading of digital assets is still in its early days and the market has yet to consolidate into any identifiable trend or preference . Almost all institutional investors use more than one platform to trade , with at least 25 % using more than 10 venues . But consolidation could start to appear as volumes increase – similar to the FX market , which also used to be highly fragmented .
And the outlook is promising . The report found that almost 70 % of the companies that have traditionally traded in financial instruments are now engaging in trade in the digital asset landscape , marking a positive long-term trend . “ This shift of traditional finance companies making the transition into digital assets could be the start of mainstream adoption of digital asset by financial institutions ,” noted PwC .
Volumes are still low – the highest number of respondents trade less than $ 10 million a month in digital assets . But these too are growing . “ Even though there are a greater number of companies that trade less volume , the volumes of institutionals that trade more than $ 10 million are much greater in total ,” found the survey . “ A bullish market may lead to more institutional entries to the market and may increase the volumes traded in the future .
With over 60 % of participants already looking to improve their current trading setup for digital assets , the market may not yet be fully mature – but it ’ s certainly moving in the right direction .
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