Deribit insight: How does cryptocurrency affect the foreign exchange market? Understand the structural differences between the two


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From the final buyer to the final seller, foreign exchange transactions usually involve multiple intermediaries; in the cryptocurrency market, the number of intermediaries usually does not exceed 1-2.

Original title: “How does cryptocurrency affect the infrastructure of foreign exchange transactions? 》
Written by: Kyle Davies, co-founder of Three Arrows Capital

In January 2020, the global average daily foreign exchange transaction volume was 6.6 trillion (trillion-level) U.S. dollars, while the total amount of cryptocurrency transactions was only 200 billion U.S. dollars. The foreign exchange market is composed of banks, exchanges, over-the-counter centralized matching platforms, bilateral trading facilities, and retail brokers. The transaction speed is fast and the transaction volume is large, but its development is slow. When will the infrastructure of the cryptocurrency market surpass the foreign exchange market? This article will compare the structure of the foreign exchange market and the encrypted trading market.

Scattered matching

Some people believe that the world will tend to establish an efficient central liquidity pool with the cheapest and most liquid execution method-this view is wrong.

Foreign exchange

In 2019, the Bank for International Settlements (Bank for International Settlements) identified at least 75 foreign exchange trading venues. The customer’s filing is the hallmark of foreign exchange transactions. The foreign exchange trading market can be imagined as a multi-dimensional grid, the units of which are client balance sheet size, transaction volume, average ticket size, transaction frequency, latency sensitivity, and technology The level of complexity (technical sophistication) and the value of auxiliary services such as research/financing/investors.

On each cross-section of this grid, there may be one or more optimal trading venues for the customer. For large, mature and large-scale banks, large-scale inter-bank trading venues with higher fixed costs and a minimum transaction volume of not less than US$1 million may be more popular, such as EBS / Reuters. In contrast, macro funds that focus on research/financing/investors with large scale but small transaction volume may prefer the model of group communication with several banks based on relationships.

Smaller retail traders may prefer a summary order book like Saxo because it is easy to operate, has a lower fixed cost, but has a higher commission per transaction. Some venues offer very small spreads, but market makers may adopt a radical last-look mechanism (last-look), that is, reject unprofitable transactions within a period of time after receiving the order. Other venues may offer larger spreads, but their pricing is fixed and there is no last-and-see mechanism. Each market participant optimizes at the level of brokers and market makers to adopt different transaction execution methods, and each venue/market maker is also responding to customer needs accordingly.


CoinMarketCap has identified more than 200 cryptocurrency trading venues with a transaction volume of more than $1 billion on June 2, 2020. Similarly, the cryptocurrency market can also be imagined as a multi-dimensional grid, but its constituent units are mainly “trusted” transaction volume, local regulations/know your customer (KYC), and anonymity. , Custody of funds and staking/lending. This has some overlap with the foreign exchange market, but the main needs of cryptocurrency customers are significantly different. Cryptocurrency customers pay more attention to fundamental differences, or differences in the product itself, and less attention to the quality of execution. To be fair, some parts of the cryptocurrency field are indeed becoming increasingly commoditized in terms of execution quality, and this trend is likely to continue — bilateral OTC spot, lending and perpetual swap contracts are examples.

Multi-tiered intermediary

From the final buyer to the final seller, foreign exchange transactions usually involve multiple intermediaries. In the cryptocurrency market, the number of intermediaries usually does not exceed 1-2. The foreign exchange market is a top-down hierarchical structure driven by banks, while the cryptocurrency market is a bottom-up ecosystem driven by users.

Foreign exchange

For decades, the foreign exchange market has developed slowly from top to bottom. Banks control the flow of funds for a large number of end-user companies through their corporate banking/M&A departments and central bank executive departments, and facilitate the flow of funds for hedge fund investors through their prime brokerage divisions, which are usually the largest foreign exchanges. Clearing agency for retail brokers.

This has formed a hierarchical and hierarchical access system, so that intermediaries at all levels can charge the maximum handling fee based on each customer’s file. Sometimes there will be minor interference events-for example, a bank won a prime broker or bank customer from another bank. Sometimes there will be serious interference events-for example, high-frequency trading companies steal a lot of market share from banks. However, the foreign exchange market system itself is a hierarchical system firmly controlled by the current dominators, and its speed of change is slow.


In contrast, the cryptocurrency market is developing from the bottom up. Retail traders can directly open accounts on the largest and most liquid spot/perpetual swap contract exchanges. The commission they pay varies according to the transaction volume and ancillary services such as lending. Nevertheless, they can enter the central matching system of the exchange with the best liquidity for trading, almost without going through an intermediary.

Cryptocurrency traders can easily transfer their currency and business from one exchange to one with better increments. Therefore, although the product innovation speed of existing cryptocurrency exchanges is equally astonishing, they will inevitably experience ups and downs. The influence of cryptocurrency traders on the market is so great that it is just a dream for foreign exchange traders.

left hand right hand

Many exchanges and market makers are leaders in the foreign exchange and crypto asset categories, and they are able to adapt to changes and continuous development, and will not easily fall into trouble.

LMAX Group is a market leader, operating several institutional foreign exchange exchanges (under the LMAX Exchange), a regulated foreign exchange dealer (LMAX Global) and a cryptocurrency spot exchange (LMAX Digital). Chicago Mercantile Exchange (CME) provides liquid foreign exchange trading and cryptocurrency derivatives trading. Many market makers and high-frequency trading companies such as Jump, Tower and DRW have foreign exchange and cryptocurrency trading platforms. Although the asset classes to which foreign exchange and cryptocurrency belong may be quite different, many participants in such platforms bring best practice knowledge of traditional markets into the innovative cryptocurrency market.

For these market participants, cryptocurrency has brought many opportunities for the following reasons: The high volatility of the cryptocurrency market brings more arbitrage opportunities; the large number of retail traders provides fertile ground for market making; The asset class with 24/7 service, cryptocurrency brings more profits and provides more profit time. It is for the above reasons that the cryptocurrency market continues to attract new and old participants to acquire wealth.

It is interesting to observe the development trends of these two markets. The user-led cryptocurrency market develops from scratch at the speed of a cheetah, while the foreign exchange market is strictly controlled by the current incumbents and continues to follow an elephant-like pace. Go slowly. I believe that many new best practices of the cryptocurrency market leaders will also become the standard of the traditional asset market. Anonymous but trust-based KYC, free access to personal assets, self-regulation and other standards will generally run through the centralized cryptocurrency market and traditional markets.

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