It’s been fascinating to watch the growth of the cryptocurrency space over the past decade. Initially, it was all very fringe. No regulation, exchanges that ran the gamut from well-meaning but ill-equipped, all the way to complete Wild West. For those of us who’ve been around for a few years, it was all very reminiscent of the earliest incarnations of the online CFD industry.
Then, when the crypto bull market of 2016-2018 catalysed much broader coverage of the space, many traditional FX brokers started adding crypto CFDs to their respective offerings. The industry had already been pivoting to multi-asset brokerage, so the addition of a whole new asset class seemed like a simple decision. However, by the time many brokers got around to doing this, the bull market was already long in the tooth, and a two-year crypto bear market ensued in which interest in the space dipped precipitously, along with the price.
The pandemic & Coinbase IPO
Enter 2020. A pandemic, the worst market crash in recent memory, followed by one of the most blistering recoveries in history. The crisis and its handling, as well as the fragilities it revealed in many areas of the traditional financial system, added further fuel to crypto’s fire just as the space was gearing up for another bull run. This time around, many institutions joined retail traders in recognising the value of crypto investments as an option against the status quo.
Cut to April 14, 2021, we witnessed crypto exchange Coinbase going public on the Nasdaq with a valuation of $87.3 billion after its first trading session. Coinbase now boasts 56 million verified users, that’s more than Robinhood and Charles Schwab combined. So, have crypto exchanges managed to leapfrog their older siblings, the humble retail stock brokers and FX/CFD brokers that paved the way for the retail trading revolution? And what have CFD brokers specifically gotten wrong in their handling of the crypto phenomenon?
You can’t set it and forget it
If you talk to anyone working a dealing desk, you’ll hear variations of the same theme. Crypto CFDs don’t generate a ton of volume, they never really have, and the top traded products are still EURUSD, the S&P 500, and gold. How can this still be the case when Binance, the number one crypto exchange in the world, generates around $50 billion in daily volumes from crypto derivatives alone?
The truth is, most CFD brokers didn’t act swiftly enough when interest in this new asset class started to grow. Back in 2014-2015 many weren’t interested. Then, by the end of 2017, the industry was rushing to offer CFDs on whatever coins happened to be in the top 10 rankings. It was a new market that most didn’t understand, so those early crypto CFDs haven’t aged particularly well. In fact, you can actually tell when many CFD brokers started adding crypto by the names they still list. Many of those coins have since fallen in favour. The bitcoins and ethers of this world are still up there, but dash, maidsafe, NEM, bitcoin cash and ethereum classic haven’t fared as well.
Know what traders want
Aside from timing, there’s another reason crypto CFDs have failed to generate the interest they could have. It comes down to a failure in understanding the product itself, and a concomitant failure in marketing it correctly. The decision of FX/CFD brokers to add crypto in the first place was more of a box-ticking exercise than anything else. It added another asset class and more individual symbols to brokers’ existing offerings, regardless of whether there was any buzz around them. A lack of knowledge regarding how crypto works from a user perspective led most CFD brokers to just treat these products as if they belonged to any other asset class. They copy/pasted the formula for adding them, populated their websites with all the relevant marketing copy, and then wondered why there wasn’t any interest.
This led to a situation in which existing clients who didn’t understand crypto remained on the sidelines, and existing crypto investors saw no reason to trade CFDs rather than purchasing and taking possession of the real thing on a crypto exchange. Meanwhile, the real traders who were actually interested in gaining exposure to derivatives were underserved until the crypto exchanges themselves started offering margin trading, or crypto-only derivatives brokers like Deribit started springing up.
Why were they so underserved? Because FX/CFD brokers each only added a handful of coins based almost entirely on where those coins were in the market cap rankings at the time. In other words, after all the hype that got them there. Also, not knowing how to manage risk on this new asset class, they just increased their spreads and imposed trading curbs, rendering these products uncompetitive. Many of these CFDs still don’t trade over the weekend, which in the 24/7 crypto world is completely ludicrous, unless you’re the CME. Finally, very few of them took crypto seriously enough to offer gateways in which traders could deposit funds in crypto and use these funds to trade on margin.
The missed opportunity of crypto derivatives
Between 2014 and 2017, the online FX industry had the opportunity to corner the market in crypto margin trading, but didn’t. Today, the daily volumes of crypto derivatives dwarf the spot markets, and yet the incumbent retail FX industry is not responsible for generating these volumes. In recent years, crypto exchanges have adapted many of the business models of the CFD brokers (down to the trading competitions and bonuses) to boost the volumes of their own leveraged derivatives on crypto. Binance is now the largest spot crypto and crypto derivatives exchange in the world by volume, and it was only founded in 2017. The aforementioned Deribit was only founded in 2016.
So, we have a situation where the incumbents have all the tools and business practices in place to offer exactly what the market wants (margin trading with fair trading practices, rapid execution, narrow spreads, low fees, large leverage ratios, negative balance protection), but they have yet to make a dent in the crypto world.
Is it Too Late?
This is the million dollar question. In failing to emerge as the standard bearer in crypto derivatives, the online CFD/FX market has found itself in a position where it has to play catch-up. We now have siloed retail markets in which your typical stock, FX and crypto traders all stick to their own types of venue. CFD brokers already know this from their experience in adding equity and index CFDs. Equities traders who actually want to own a piece of a company are not likely to come over to CFDs, but those who want to speculate on margin might. Also, existing CFD traders who have traditionally just traded FX and commodities can be enticed by a broader CFD offering.
When CFD brokers came to FX, they came from a position of strength. They invested in bringing over veterans from institutional FX, they created marketing content and analysis that conveyed a sense of knowledge and experience. They spent years evangelising the merits of FX trading, from its 24/5 structure as Asian, European and North American markets come online one after the other throughout the day, to its decentralised, over-the-counter nature. With a few notable exceptions (eToro being one of them), they haven’t done this for crypto. The fact that crypto CFDs trade according to the same market hours as FX CFDs tells you almost everything you need to know about how crypto has been handled by the incumbents.
The result is that new crypto investors inevitably find their way to Coinbase, while those interested in margin trading or purchasing more illiquid tokens go to Binance. Even the existing client bases of the CFD brokers don’t see the value in trading crypto with them. In fact, finding out how many of their clients have bought, sold or traded crypto in the past 4 years with other outfits would be a fascinating survey to conduct. The results may be quite surprising, particularly to business development and dealing departments.
The fact is that crypto isn’t going anywhere. Each subsequent 4-year cycle grows stronger than the last, both in terms of retail and institutional involvement, as well as technological innovation. This isn’t a flash in the pan, it isn’t a speculative bubble at its core, despite always being in the midst of one when most people hear about it. It’s likely to be the shape of things to come for the trading of all asset markets as central bank digital currencies start to emerge and more of the traditional financial system becomes tokenised. The trend is plain to see. It really is an adapt or die moment in many quarters of traditional finance. Despite all this, we’re still very early in the crypto revolution, so there’s still time to correct the mistakes of previous market cycles. Those who learn will have a seat at the table in years to come, those who don’t, won’t.