Since 2009 when the first cryptocurrency - Bitcoin - was created, the crypto market has attracted a new tribe of traders. Described by billionaire Mark Cuban as “more religion than solution to any problem” cryptocurrencies offered a more approachable entry point for many new traders and the opportunity to be involved in something new right from the start.
Backed by strong influences through social media platforms, it particularly appealed to my fellow Generation Zs who have grown up online, or even virtually through videogames, you could say: “For many, the first taste of digital assets are through ‘play-to-earn games’ which reward players with NFTs and cryptocurrencies that can then be used within the game itself, or traded for cash”, explained the BBC.
Unlike the traditional finance (TradFi) space, trading crypto was much easier to get your head around for people who’d never traded before. Retail crypto traders are also not limited to when the big stock exchanges are open - they can trade whenever they want.
And while it may not appeal to everyone, retail and professional crypto traders alike were excited by the volatility of the crypto asset class. “With something like Bitcoin, it’s exciting because there’s constantly something happening,” said Tom Meyvis, professor at New York University’s Leonard N. Stern School of Business. “You can check it 10 times a day and the price can vary wildly.”
It’s no secret, however, that the crypto market took a knock last year with an ongoing bear market and the collapse of FTX.
An article by Bloomberg titled ‘FTX implosion rattles retail investors who fear their money is gone’ included quotes from investors showing a huge slump in confidence. “This is probably the worst thing ever to happen to crypto…I don’t think it’s safe to store money on exchanges at all, especially after this”, said one investor.
Their concerns are understandable. But where does it leave crypto traders? Do they abandon trading crypto altogether and look for alternatives?
Noises from the trading world suggest that crypto will start to concede ground to its more established cousin, with native crypto traders shifting their interest to look for opportunities in the world of traditional finance.
In a recent report, JP Morgan found that 72% of traders “have no plans to trade crypto [or] digital coins”.
Trading platform Robinhood - which specializes in supporting the biggest variety of assets under one roof - also reported a decrease in crypto revenue for two quarters running in Q3 and Q4 of last year.
But where are those investors going?
According to the reports of leading global banks, they’re moving towards traditional and alternative asset classes. Banks are seeing an increase in revenues from investors who are choosing traditional currency trading over cryptocurrencies as the bear market continues.
Bloomberg revealed that, after years of stagnant volumes, trading using traditional currencies has hit historical levels citing volatility in cryptocurrencies as a key driver.
It’s an exciting opportunity for the world of traditional finance trading for a few reasons.
The first is that it means its appeal is expanding past the veteran traders and traditionalists to attract a younger generation of traders.
James Royal, principle reporter at Bankrate said that, “the shine has come off these coins” and “buying an S&P 500 index fund regularly and then holding on through thick and thin has built the fortunes of many American millionaires”. It’s an approach that is becoming increasingly appealing to millennials and Gen Z.
The traditional finance trading world should welcome them with open arms. As the World Economic Forum said, “without acceptance from the ‘old school’, the opportunity that comes with a shifting investor base could be lost by the industry and negatively impact the growth of the broader economy as well”.
Which brings me on to the second reason it’s a good opportunity. Traditional finance trading hasn’t evolved much over the years. If it wants to hold on to the new generation of traders, it will need to look at embracing some of the culture and ideas that has made crypto trading so approachable.
For example, the crypto market has led from the front in its use of social media. More and more retail investors are seeking out insights and advice on where, what and how to trade from social media. The crypto market recognized this early on and has embraced the platforms to engage these generations.
But there is a danger of misinformation on social media. Rather than shying away from it, this is a great opportunity for traditional finance to use the platforms to educate. As the World Economic Forum put it, “engaging with them on these platforms to debunk misinformation and spread helpful insights, building trust and helping the shifting investor base build wealth.”
This learning curve is a two-way street. There is also a huge amount that the traditional finance world can teach crypto for it to mature into a more stable alternative finance space. One that doesn’t always feel like it could be one small step away from another exchange collapse or wrong decision made by one of crypto’s more eccentric characters.
A key change would be crypto exchanges ensuring that they have client funds segregated. This is standard practice for traditional finance trading platforms, required in many instances to meet local regulations. The New York Department of Financial Services recently issued guidance to crypto service providers on the need for this change and disclosure around how they are keeping funds separate from their own.
As Omid Malekan, adjunct professor at Columbia University Business School said, “co-mingling client funds is a big no-no in traditional finance and there is no reason for crypto to be any different. Segregated accounts make it easier to audit a custodian during normal operation and to unwind in the event of bankruptcy”.
It’s hard not to link this guidance from a timing perspective to the fall of FTX but it is not the first cryptocurrency-based company to fail, and the new rules have been in the works for some time. With them, crypto exchanges should be able to demonstrate that they have the reserve for customer funds, meaning that customers’ funds are safeguarded, ultimately bringing trust back to traders.
The Financial Times recently said that “the boundaries between cryptocurrencies and traditional asset classes are blurring ever further, as established Wall Street players make trading digital assets part of their main business - and companies native to bitcoin push into mainstream markets”.
While crypto asset classes may be struggling to attract investors, confidence will return eventually. The hope is, by that point, the blurring between crypto and traditional finance will have benefited both sides of the fence and the future of trading will be more innovative, approachable and secure across the board.
For more information about how we work with trading platforms, brokerages and Web3 node validators to ensure their infrastructure is set up to enable new and innovative approaches, check out our industry page.
Trading expert Mike works with customers not just as a hosting provider but a partner to ensure their infrastructure enables future growth. A golf newbie, he's regularly one shot away from selling his clubs.
There are very few industries that haven’t made the move to the cloud over the last decade. The financial industry is one of the outliers that retains at least one foot, if not both feet, within dedicated infrastructure.