Liquidity is one of the main attributes of an asset class that deserves an allocation in a retail or institutional portfolio. Clashing indicators that measure liquidity especially for over-the-counter financial assets, are nothing new. Corporate bonds or stock options, for example, are largely traded over the counter; liquidity fluctuates and measures are more than one (e,g, issue size, bid-ask spread, trading block size, price impact from trade, etc).
Naturally, the emerging crypto asset class cannot escape the liquidity conundrum. With this year’s increase in the overall market capitalization and with more than 5,000 tokens now issued on the blockchain ecosystem; we start paying attention. We have already witnessed the first flash crashes on exchanges, like GDAX run by Coinbase, simply because a large order came in that resulted in wild price swings.
On June 21st, 2017 around noon EST: “Within seconds the price of ETH crashed from ~$320 to as low as $0.10. While the price recovered quickly, the rapid price movement caused many traders to experience margin calls or stop loss orders, resulting in potentially severe losses.” Source; Coinbase is reimbursing losses caused by the Ethereum flash crash
This recent flash crash was caused by a multimillion dollar sell order ETH/USD. Given the crowded pipeline of crypto-hedge funds (see more details in Shapes and colors of the booming US crypto hedge fund space) we expect an increased need for liquidity providers in the crypto asset class. Add on to this, the additional emerging appetite from asset managers (fund managers, family offices, pension funds, governments etc) there is a pressing need to create liquidity pools for institutional trading of cryptos.
I see a significant risk for the crypto asset class because there are too many startups building software and apps to facilitate the evolution of the crypto market, but there won’t be enough liquidity to accommodate the users of these technologies (especially for institutional appetite) once they grow out of the MVP-beta phase. I am worried even more because this pipeline of technology is also congested and we will be flooded with such tech-tools in the next 3-4 quarters.
Crypto Liquidity aggregators in need. The race is on!
Who’s who in the crypto liquidity aggregation space at the institutional level
To trade large quantities of crypto assets, there are few established businesses:
Cumberland is a US mining company offering two-way markets for institutional size transactions (probably the largest). Genesis Trading and Itbit is based out of NY; Circle Financial, out of Boston (the money transfer company); and Gemini Exchange (the Winklevoss Brothers). Bitcoin Suisse from CryptoValley Switzerland.
The biggest problem institutional clients face is that each exchange operates in isolation and has its own cumbersome agreement requirements.
There is a pipeline to address the problems around the liquidity for crypto-assets, that really needs to be filled up. I have identified the upcoming platform, code-named “Project Omni,” that is being designed to serve as “the first large-scale institutional infrastructure specifically targeted towards crypto assets” from an ex-State Street executive. The B2Broker who is building liquidity and brokerage software for the crypto space; a broker and a B2B liquidity enabler with a business focus towards the East (from the Arab world all the way to Japan).
Who else did I miss, operating in the crypto institutional space?
Efi Pylarinou is a Fintech thought-leader, consultant and investor.
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