Tag: digital assets

Exchange vs. Over-the-Counter Markets: Eternal War

Financial markets are complex environments with their own conjunctures and institutional structures. Historically, there are two basic ways to organize financial markets—exchange and over the counter (OTC).  The cryptocurrency is no exception. Today we’ll focus on the latter, OTC market, which is now gaining momentum in the crypto world.   What’s its nature? Over-the-counter trading is considered as one of the principal ways to trade crypto for those who want to buy or sell a large portion of digital assets. OTC trades are often placed by high-volume players – ‘crypto-whales’, such as hedge funds, private wealth managers and high-net-worth individuals. Despite the fact that OTC trading is not available for every crypto investor, the Bitcoin market here is roughly three times larger than the exchange one. As a rule, a minimum of $75,000 must be on the table before the discussion between parties can even begin. On average, the game for an institutional player in the OTC market usually starts in $50,000-and-up arena, depending on a company’s policy or individual’s preferences. Some centralized exchanges have already started offering OTC services. In summer, U.S. crypto exchange Bittrex launched an over-the-counter (OTC) trading desk. The new service allows approved clients to “quickly and conveniently trade assets”, and supports nearly 200 cryptocurrencies already offered by the exchange.  One of the latest to join the ‘OTC wave’ is U.S.-based crypto exchange Coinbase which opened its over-the-counter (OTC) crypto trading desk in November, 2018. In his latest interview, the company’s Head of Sales Christine Sandler said why the firm had resorted to the OTC trading: “We launched our OTC business as a complement to our exchange business because we found a lot of institutions were using OTC as an on-ramp for crypto trading” Why ‘whales’ only? It’s no secret that the rich do things differently.  That’s why they are the rich, though. Here ‘big boys’ could avoid excessive commission fees and, in a manner of speaking, feel more decentralized. When compared to exchanges, there transactions are completed through a centralized source. In simple terms, there’s a third party acting as the mediator between buyers and sellers.  If you have some extra millions of dollars, it will be extremely inconvenient to place such an order via crypto exchange due to the hassle with continuous verifications and big commission fees. Plus, the order can move the entire market down and hence will make a negative impact on your fortune. Over-the-counter markets are generally decentralized and have no centralized trading facility. This promotes heavy competition between counterparties and lower transaction costs. Here, there are many mediators who compete to link buyers to sellers. The advantage is that such rivalry ensures that costs for intermediary services are as low as possible. The big crypto OTC providers are Cumberland, Jump, and Circle. But it’s hard to rank them because their transactions and earnings are necessarily kept private. OTC market is not entered unreasonably. One of the principle advantages of OTC trading is that clients can trade with each other via broker without anyone else knowing about their interacting. It’s like you are the only one in restaurant, and brokers are the waitresses who compete in order to serve you.  The trendiest OTC instrument to have arrived on the scene is ICO investing. In most cases the ICO model allows investors to support their favorite projects and receive tokens directly without strict oversight from authorities.  However, where there’s a profit to be made, big brother (regulator) will be watching. Since OTC trading provides the possibility of avoiding official records, the regulators started watching quite thoroughly. That’s why traders and brokers even in OTC market may also need to complete KYC and AML procedures on each other to make sure they satisfy legal requirements. 

Articles/January 17, 2019

Central Banks Think Crypto will Fail – This is Why They’re Wrong

We typically think of crypto as a threat to the traditional financial system, and therefore to the current industry incumbents and institutional players - from JP Morgan and HSBC to Central Banks and the Federal Reserve. However, this over-simplified perspective ignores the fact that the current industry incumbents are actually among the blockchain technology's biggest investors, and that some Central Banks have been inspired by crypto to explore the possibility of Central Bank-issued  digital currencies. So, is crypto a threat or an opportunity for these giant companies and institutions? The answer is both. Blockchain technology is an opportunity for traditional players because it has the potential to eliminate bottlenecks that exist within the current financial paradigm. Visa is exploring blockchain as a way to facilitate faster cross-border transfers, while Deutsche Bank believes they can aid faster clearance of securities trades. With few exceptions, the opportunities that traditional players see in adopting blockchain technology are those which would improve back-end processes, creating monetary savings. The position of traditional incumbents who see blockchain technology as an opportunity rather than a force of disruption feels a little similar to the position of Blockbuster CEO Jim Keyes in 2008, who famously said: "Neither RedBox nor Netflix are even on the radar screen in terms of competition." Ten short years later, Netflix is worth $118 billion and Blockbuster is largely out of business. Incumbents limit their perspective to what they can imagine within the current paradigm, in a way that tends to leave them flat-footed in the face of disruption. They can imagine new technologies as complimenting their existing services, but not disrupting them. But blockchain and crypto-native startups, like Netflix and the Internet, are a genuinely disruptive force and they're not going away. However, the fact that crypto is a threat does not mean that traditional institutions necessarily view it as such. In fact, many of them remain very sceptical. Earlier this year, the research bureau of the People's Bank of China published a paper written by one of its employees on "What Blockchain Can Do and What it Can Not". The paper's central conclusion was that cryptocurrencies will not replace the fiat monetary system, but that blockchain technology itself holds promise. In other words: Blockchain, not Bitcoin. Sound familiar? More recently, Nic Carter - Cofounder of coinmetrics.io - took to Twitter to publish his account of the sentiment of talks held at DC Fintech week at the International Monetary Fund (IMF). One panel was made up of central bankers - Nic summed up their sentiment like this: "- they are laser focused on central bank digital currency - they have 0 concern about BTC/crypto threatening dominant monetary regimes - general view that everything can be regulated  - do not hate crypto, just indifferent" This echoes the sentiment of the paper from The People's Bank of China - central banks are confident in the superiority of fiat and aren't worried about the potential of cryptocurrencies to topple it. If this position sounds overconfident, that's because it is. The fiat monetary system is failing, and it's not clear if things can be made better within the system. John Hopkins University economist Steve Hanke believes that prices in Venezuela are doubling every 52 days, having risen by 12,875% during 2017.  Inflation and quantitative easing - flooding the economy with more cash to stimulate growth, as was done throughout the West in the early 2010s - cause asset price bubbles, an upwards transferral of wealth from the many to the few and steal wealth from savers and wage workers. The national debt of the US is $21.6 trillion, and it's ordinary workers who will have to pay this off as the the value of their salary is inflated away. Fiat is failing, and crypto is offering a genuine alternative. The positive thing for crypto believers is that what central banks think probably doesn't matter too much. Disruptors don't need permission from incumbents. Disruptors innovate to better meet people's needs, and incumbents simply see their relevance decline as the new world is created around them.

Articles/December 11, 2018