The battle for supremacy in cryptocurrency trading has intensified as some of Wall Street's biggest players begin to challenge digital asset specialists who already handle billions of dollars' worth of transactions every day.
The most active traders and market makers in the nearly $ 3 trillion digital asset space include Alameda Research, B2C2, Cumberland, and Genesis Trading, none of them household names in traditional financial markets.
But this year's rapidly rising valuations have now attracted trading houses that already dominate major markets like stocks, currencies and futures. Jump Trading, Jane Street, Tower Research and Hudson River Trading, relative newcomers to digital assets, they now compete with native crypto companies to be the fastest and best.
โWe know the big guys are coming, but they don't scare me. We started in 2017, so we've already spent a lot of time on that, "said Michael Safai, owner and CEO of London-based Dexterity Capital, which he created to become" the biggest and baddest prop trading company in the world. "."
Dexterity, a specialist in digital assets, trades between $ 2 billion and $ 4 billion in cryptocurrencies a day.
Banks and Wall Street trading houses have until recently played a negligible role in cryptocurrency trading, which started with retail investors and grew to accommodate companies that were happy to take the other side of gambling bets. individual.
Retail investors trade on hundreds of exchanges where bitcoin, the most popular cryptocurrency, can be bought and sold. The price of digital assets can vary wildly on different exchanges, and traders can benefit from differences in prices if they are fast enough and have the scope to place bets on many platforms.
This is what prompted Sam Bankman-Fried to establish Alameda Research in 2017, with the aim of capitalizing on the disparity between the price of bitcoin on exchanges in South Korea and those in the West. He then launched FTX, the exchange, in 2019.
Alameda has become one of the key players in offering prices to cryptocurrency traders around the world. It trades $ 5 billion in coins daily, across thousands of products, said the company's co-CEO Caroline Ellison. He said an industry publication.
"While established traditional finance companies are increasingly entering the crypto trading space, that's because they are drawn to the equally growing volume and opportunities that are being established in the space," said Sam Trabucco, co-executive director of Alameda Research, to the FT.
While many companies in the crypto sector started four years ago, traditional companies have taken much longer to sink in. Jump Trading announced the launch of a digital unit in September of last year.
"[Their entry in to the space] it changes the kinds of things Alameda needs to focus on, โTrabucco said, noting that there is more competition to be the fastest. "But so far, increased competition has not matched less success."
In traditional markets, inefficiencies like South Korea's so-called "kimchi premium" are quickly removed by arbitrage. In crypto, this process is much less developed, but after the advent of Wall Street's high-frequency trading ventures, opportunities for easy profit are increasingly rare.
"Traditional HFTs are becoming more comfortable when trading crypto exchanges and [they] they are invading [opportunities that were] the bread and butter of crypto-native prop stores, โsaid Joshua Lim, director of derivatives at Genesis Trading.
This is pushing crypto-native companies to expand their activities in areas such as lending, off-exchange operations, and exploiting inefficiencies in new areas such as decentralized finance, where profits are still juicy.
Rob Catalanello, co-CEO of B2C2, backed by Japanese bank SBI, said B2C2's interest in trading on exchanges has waned as more investors were willing to strike bilateral deals. Today, 65 percent of its volumes are done on platforms, compared to practically all transactions last year.
Institutional investors are interested in products such as undeliverable crypto forwards, a type of derivative widely used in currency markets. The contract owner can trade cryptocurrencies without receiving the physical asset when the deal expires.
While trading on exchanges is declining, Genesis has seen huge growth in activity at its loan desk, handling $ 35.5 billion in crypto loans in the third quarter of the year, a 586 percent increase over the same three months in 2020.
Derivatives markets have also seen strong growth. And while the big box stores of traditional finance are focusing on trading at this stage, the incumbent crypto rulers are broadening their aspirations and turning their sights to the big Wall Street banks.
"We are one of the biggest, if not the biggest, market makers in crypto and we want to become the first digital investment bank," said Max Boonen, founder of B2C2.
