Why are professional traders unable to access the liquidity of the global cryptocurrency market?
Original link:https://cointelegraph.com/
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Author: Apifiny CEO Haohan
Currently, the cryptocurrency trading market is in its early stages, and in a decentralized market, regulation plays a key role.
"Fortune" magazine believes that Coinbase's IPO plan is a "milestone event in the encryption industry." Like Netscape’s IPO plan that marked the legitimacy of the Internet, Coinbase also sent a signal to the general public: According to the US Securities and Exchange Commission (SEC), cryptocurrency transactions are legal, compliant and safe. Investors will have the opportunity to hold shares in the largest U.S. crypto trading platform.
Many see an investment in Coinbase as an investment in the future of the cryptocurrency trading industry. Coinbase is the largest cryptocurrency exchange by trading volume in the United States, and its trading volume is three times that of the second largest exchange in the United States, even leading the international level. However, the volume of the cryptocurrency trading market is still far from that of the traditional trading market.
To better understand the nuances of the crypto trading platform market, it’s best to take a look at some of the current state of the industry.
All the important factors that affect the maturity of the market are mentioned in the table, and they are also the problems that cryptocurrency trading institutions are currently facing. Currently, there is no single exchange that enables traders to access global liquidity, discover cross-border prices, and access the world's best prices.
Today, the cryptocurrency trading market remains highly fragmented with no dominant players.
The world's five largest cryptocurrency exchanges accounted for 41% of the global total. Among them, the trading volume of Coinbase, the largest exchange in the United States, only accounts for 2.1% of the global trading volume, ranking only 19th in the world. In the global market, there is no mature market leader as we expected.
Compared to traditional stocks, the cryptocurrency market is highly fragmented. The world's two largest stock exchanges account for 51% of global stock daily trading volume, while the world's three largest cryptocurrency exchanges only account for 27% of global cryptocurrency daily trading volume.
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Lack of a unified global trading market
The cryptocurrency trading market is still in its infancy. In communicating with institutional traders and independent professional traders, we understand that institutions are still looking for platforms that meet institutional-level trading capabilities, and these requirements cannot be achieved on a single platform. For example:
· Global Price Discovery - Access to local currency normalized prices for global markets.
· Global best deal quotes - global order book, normalized by exchange rates and fees in local currency.
·Global liquidity acquisition - access to the liquidity of the global trading market, not just the liquidity of an exchange.
Each exchange is now its own trading "inland lake" with no "canals" connecting them. In the U.S., traders can only trade with 2.1% of users worldwide, and their order books are completely different from other U.S. exchanges such as Coinbase and Kraken.
Clearly, traders will benefit from a global order book in a single currency, as well as access to the world's best prices and the liquidity needed to execute large trades. The industry is in dire need of a “crypto solution” equivalent to the National Best Offer (NBBO) for traditional securities.
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Centralized exchanges are only part of the trading landscape
Binance and Coinbase are centralized exchanges that match orders from buyers and sellers and execute trades and settlements. The user's cryptocurrency assets are kept by the exchange, and the user can only trade with other users of the same exchange. Even in terms of volume, centralized exchanges cannot capture the total trading volume of the entire digital asset.
Figuring out how to incorporate the price discovery and liquidity of decentralized exchanges into centralized exchanges will have important advantages.
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Decentralized exchanges are growing, but lack the infrastructure to scale
Trading volume on decentralized exchanges accounts for roughly 15% of all cryptocurrency trades (based on data from CoinMarketCap on Feb. 16). The trading volume of decentralized exchanges has been growing rapidly, and Uniswap’s trading volume has surpassed Coinbase even in 2020. Amazingly, Uniswap has achieved this feat with only 20 employees. Today, Venus’ trading volume is neck and neck with Binance, which at the time of writing is leading the market in terms of 24-hour trading volume.
Institutional investors demand faster decentralized exchanges with lower fees and robust KYC procedures. Therefore, decentralized exchanges must be built on faster and cheaper blockchains in order to attract institutional traders.
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There are no real centralized exchanges - only real brokers
Adding to the confusion, crypto exchanges today are more like regional brokers than true, global exchanges. Take the example of trading Apple (AAPL) on E-Trade and Bitcoin (BTC) on Coinbase.
In the United States, professional traders who want to trade BTC can only participate in a small part of the global trading market through Coinbase. Price discovery and liquidity are only available through the BTC/USD order book on Coinbase. In other words, over 97% of the world's supply, demand, price discovery, and liquidity are only available through hundreds of exchanges.
To sum up, compared to selling AAPL on E-Trade and selling BTC on Coinbase:
E-Trade places orders on Nasdaq, which can almost capture nearly 100% of AAPL spot transactions.
Coinbase places orders on its own order book, capturing only 2.1% of all trades globally.
The status quo is that there is currently no true "global cryptocurrency exchange market" in the world, but only hundreds of smaller local markets. If the current situation of the global cryptocurrency market is analogous to the traditional trading market, it is that AAPL is sold on more than 300 different exchanges, each of which has its own buyers and sellers.
There are two sides to this question. First, trading on a centralized exchange strips away many of the advantages of decentralized assets. Second, cryptocurrency exchanges are fragmented into hundreds of decentralized exchange “land lakes,” each with its own local supply and demand of fiat and cryptocurrencies.
Centralized exchanges manage token listing permissions, custody, order matching and execution, and brokerage services. When users trade on centralized exchanges, users give up a lot of control.
Centralized exchanges are severely limited in accessing global markets. Exchanges such as Coinbase and Gemini only accept users (U.S. only) for fiat currency trading pairs (USD only) in limited regions, while E-Trade opens up access to numerous exchanges, stocks, ETFs for its traders Waiting for the gate. In contrast, centralized exchanges have closed their doors to all other exchanges, severely limiting price discovery and liquidity, which results in higher spreads, lower fill rates, higher slippage, i.e. Commonly referred to as market inefficiency. The concept of optimal buying and selling doesn’t yet exist in the crypto world because the BBO on Coinbase is not the same as the BBO on Gemini, Binance or Huobi.
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The service for professional traders is not perfect
From the perspective of professional traders, the current market does not yet have sufficient maturity and global trading capabilities. The segmentation of the cryptocurrency trading market is still in its infancy, and the needs of professional traders have not been met, mainly due to the following two reasons: (1) the inability to efficiently access the global market; (2) the inability to obtain the best price in the global market, There is also no access to institutional-grade liquidity.
There is no trading market that can truly cover the whole world, retail and institutional traders cannot enter the truly global market, and there is no trading market that provides institutional-level DEX transactions.
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Asset digitization will drive industry growth
Compared with the untapped digital asset market, the stock market is almost negligible. While there is a good chance, it is still too early to predict the outcome.
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Numerous exchanges expose traders to compliance risks
Innovations in institutional-grade trading technology are not yet widespread. The current trading volume rankings only tell the story now, the story of the future will be told by trading markets that provide real, global best bid and ask price discovery, institutional input on DEX pricing and liquidity access, and the ability to execute global trading strategies on a single platform.
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