Bitcoin market structure
The volatility of digital assets and cryptocurrencies is a given, but adding more complexity and risk in terms of market structure will only further impede participation by a broader set of institutional investors. A closer look at the custody and OTC models being utilized and the challenges surrounding delivery-versus-payment DvP mechanisms reveals that as the crypto market evolves, so, too, are solutions to address the thorniest issues. The centralized exchange model is the dominant approach for trading digital assets and cryptocurrencies in public blockchains because it solves the limitation of numerous blockchain protocols relating to trading speed and settlement fees. Mining fees are per transaction rather than the traded value.
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- Cryptocurrencies and Digital Assets: Market Structure, Risks, and Opportunities
- Bitcoin is COVID immune!
- Want to Buy Crypto? Here’s What to Look for In a Crypto Exchange
- Electronic Journal of Social Sciences
- Digital Asset Market Structure Shifts to Institutions
- Bitcoin Market Structure, Fees and Lightning
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In the early s, the crypto market consisted of a handful of small, retail-focused brokers. Today, BTC sits among the most liquid assets in the world. Users all over the world can access completely fungible assets. Public blockchains allow frictionless transfer of crypto and fiat in minutes. Individuals can custody assets themselves as securely as the banks.
Unlike the NYSE or Nasdaq, retail users can trade on the largest crypto exchanges directly without intermediation. Even with these advantages, the crypto market structure is opaque and poorly understood due to global fragmentation, rapid change, and the diversity of participants.
This essay outlines the two significant evolutions in the crypto market over the last decade and articulates a vision for what the future could hold.
The prehistory of the crypto market began with p2p trading over Bitcointalk and IRC. The first real market structure began in earnest in July with the launch of Mt. Over the next five years, many early exchanges launched fiat on-ramps to service individuals.
As adoption grew, over-the-counter OTC desks began servicing the handful of early institutional firms. Without sophisticated market makers, liquidity was poor.
Cross-border and cross-venue spreads were often measured in single-digit percentages. The influx of new market participants in December overwhelmed exchanges daily and marked the end of an era. Since December , the crypto market evolved to a 2. Over this time, derivatives volumes grew over 25x while bid-ask spreads fell 10x. The market matured from manual, expensive, and BTC-denominated to fully electronic, cheap, and stablecoin-denominated. At maturity, the 3.
Crypto trading remains capital inefficient due to market fragmentation and a lack of industry-wide credit assessment. Today, exchanges have high margin requirements, and firms cannot cross-margin, i. This forces firms to fully fund nearly all their trading activity and subjects trade settlement to many block confirmations at-minimum. Full funding is especially taxing in highly volatile environments when on-chain congestion is most significant.
As a result of these inefficiencies, the perpetual swap has become the dominant source of short-dated funding. Credit creation and shortened trade lifecycles drive capital efficiency. Decentralized finance DeFi first appeared in late and grew parallel to Market Structure 2. As DeFi continues to gain structural importance, CeFi and DeFi will converge as they see overlap in market participants, liquidity pools, and product UX.
Throughput and high gas fees remain significant structural barriers. As scalability improves, on-chain financial infrastructure will begin competing with centralized infrastructure. The long-term winners are users, who can explore the spectrum of options across trust, price, risk, and UX.
The crypto market structure has gone through two significant evolutions over the first decade. Despite rapid innovation, the market is far from maturity or the scale needed to support a multi-trillion dollar market cap.
Crypto market change has always been grassroots, driven by entrepreneurs and user demand. While this has resulted in some wheel re-invention, the optimistic view is that innovation wins long-term—the crypto sandbox of today is the design of every major market in the future.
Historically, the crypto market has been opaque and poorly understood. We hope this essay provides a useful starting point for future dialogue as we build an open and efficient financial system over the coming decade. If you are focused on Market Structure 3. Please reach out at any stage, the earlier the better: arjun paradigm. Crypto Market Structure 3. Market Structure 1. Market Structure 2. The major drivers of this shift are: Derivatives liquidity eclipsing spot: Since , the epicenter of crypto liquidity shifted from the spot market to derivatives.
In , OTC trading was primarily over voice and chat. Rather than firing up Skype, clients can connect directly to platforms hosted by market makers and stream quotes, execute trades over API. The emergence of lending: In , there was nearly 0 credit in crypto. This resulted in significant price dislocations and evaporating liquidity during high volatility periods. Today, the most liquid trading pair of almost every top crypto asset is stablecoin-denominated.
Institutional services and products: In , institutions were limited to accessing the market through retail channels. ECNs like Paradigm. Market Structure 3. Capital efficiency Crypto trading remains capital inefficient due to market fragmentation and a lack of industry-wide credit assessment. Indirectly, PBs like Coinbase enable clients to margin across venues and cold storage speeds up trade lifecycles by moving transfers off-chain.
Crypto-native derivatives clearing: In traditional markets, exchange-traded derivatives are cleared by central clearinghouses who maintain the ledger of margin calculations.
Over the last few years, firms like Zero Hash and ErisX have attempted to port this model to crypto directly. Alternatively, approaches like X-Margin could achieve this crypto-natively by making cryptographic collateral attestations on-chain. A formal institutional repo market could enable sizable near-term borrowing without exposure to perp venues.
Lower on-chain confirmation thresholds: Superior understanding of public blockchain settlement assurances drives faster deposit times between known counterparties. These guarantees allow exchanges like FTX to accept deposits from other Fireblocks users, as soon as the transaction hits the mempool.
Even in its 1. Once the starting point of liquidity, major global crypto exchanges are now a late mover in the long-tail. The direct implication is that brokers unable to access on-chain liquidity have an immediate disadvantage versus those who can.
This shift happened quickly; the impact of AMMs on centralized liquidity was visible as recently as March For many MMs, this has been a real forcing function to onboard to DeFi. Crypto-native cross-margining: Margin positions in DeFi have been tokenized since the start, taking forms like Uniswap LP shares, Compound cTokens, and Synthetix synths.
DeFi margin tokens are fully-collateralized and callable on-chain, enabling transparent rehypothecation when used composably e. While FTX has already pioneered tokenized margin on centralized venues, the design surface is only now opening up.
While critics often focus on gas fees, DeFi offers users superior security UX non-custodial and frictionless access. Scanning a QR code and signing a MetaMask transaction is accessible and closer to using Snapchat than fiddling with a traditional brokerage. What does this mean for CeFi players? A few implications: Better DeFi interfaces: Exchanges will lean on their scale efficiency to intermediate DeFi for users the same way they have with staking services.
Offering interfaces to access DeFi is a natural way to prevent capital flight on-chain. Providing liquidity of locked assets, lower fees via pooling , and additional off-chain margin are some ways exchanges can incentivize users to access DeFi through their interface. For many users, an exchange account may be the most convenient way to access on-chain protocols as the default wallet. Protocols like Arwen can enable non-custodial trading for exchanges pursuing a hybrid approach.
Low effort solutions could be structured products trying to mimic on-chain yields. Institutional DeFi support: Retail users have lower frictions to access DeFi relative to large institutions, subject to compliance or regulatory hurdles.
As larger firms are beginning to view DeFi markets as a first-class citizen, service providers will seek to enable frictionless access for their clients without compromising existing workflows. Conclusion The crypto market structure has gone through two significant evolutions over the first decade.
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Cryptocurrencies and Digital Assets: Market Structure, Risks, and Opportunities
Sign in. Pro Content. Insights Content. By Ashwath Balakrishnan. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token.
Bitcoin is COVID immune!
He believes that in this cycle, institutional investors have finally come, but their investment in crypto is limited to Bitcoin. Papers on the current structure of the cryptocurrency market and why it causes extreme volatility throughout the market cycle continuously being written. But this also means that encryption is already ahead of itself in terms of market development. But there is a lack of key market participants. As shown time and time again, it is easy to be tempted to buy meme coins with a small unit preference. This is why we see that some things that have not been delivered can still enter the top 10 market capitalization ADA, XRP, etc. Due to their liquid nature LP redemption , they tend not to invest in a position that is difficult to get rid of.
Want to Buy Crypto? Here’s What to Look for In a Crypto Exchange
The crypto market saw heavy selling across the board today in a deleveraging event that followed the signing of a new infrastructure bill that targets crypto users in the US, and signals from Twitter that the company is not looking to buy bitcoin BTC at the moment. Along with the market sell-off came liquidations of leveraged crypto derivatives trading positions. According to data from Coinglass, USD m were liquidated across the entire crypto market over the past four hours as of press time, with around USD m of that seen on Binance alone. In the past 24 hours, almost USD m in trading positions were liquidated, per Bybt. Looking at bitcoin specifically, USD
Electronic Journal of Social Sciences
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Digital Asset Market Structure Shifts to Institutions
This has been a historically important level, and the resistance here has proven to be somewhat significant. This is around where it has been trading throughout the past few days. It has yet to break above this level for an extended period of time throughout the course of this recent move higher and has primarily been consolidating around its current price. If bulls cannot step up and push BTC any further, this consolidation phase could revert into the downtrend that it was previously facing. A higher-high made after a higher low was created.
Bitcoin Market Structure, Fees and Lightning
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New ways of managing, transacting and investing our money continue to emerge as the financial world around us evolves. One major change seen in the last decade has come from the rise of cryptocurrencies or "crypto," if you prefer brevity — digital currencies that lack centralized control but enable frictionless transacting and serve as a unit of account in a democratized financial system. This compares to the traditional fiat financial system, which relies on central banks and governments to issue and regulate the money supply while also facilitating transactions through an orderly payments system, among other responsibilities. Most countries have their own fiat currency or one pegged to an international reserve currency like the U. When you exchange the fiat currency of one country for that of another on decentralized, over-the-counter markets, you call this a foreign exchange or "forex". There are clear differences and similarities as it pertains to using these currencies for buying and selling goods and services.
Source: Gerd Altmann via Pixabay view more. For this reason, it had a substantial impact on the behaviour of all financial instruments, including cryptocurrencies. It turns out that the fluctuations experienced by the virtual currency market during this period reflect changes in other capital and commodity markets. This market has also shown relative stability during this difficult time. It is another proof that cryptocurrencies can be treated as a mature and full-fledged financial instrument. Social systems are characterized by a vast network of connections and factors that can influence their structure and dynamics.
Bears wreak havoc in the crypto market and major coins bleed out in the lower and higher timeframes. However, analyst William Clemente has pointed towards the current funding rate for BTC futures across all exchanges. At the time of writing, this metrics stands at 0.