Digital asset market structure, initially built to address the needs of retail and high-net-worth investors primarily, is coming under the increasing influence of institutional investors, according to a new report from Coalition Greenwich – Digital Asset Market Structure: Institutions Take the Reins.
The report predicts that crypto market structure will increasingly be influenced by the demands of institutional investors and traders.
It found that 44% of front-office professionals and 59% of the buy-side expect most trading volume to be on fully decentralised exchanges in the next two years.
In addition, 62% of front-office professionals expect the majority of trading volume to be on order books over the same timeframe.
The market is shifting from spot trading and physical ownership such as holding bitcoin) to both physical and financial instrument ownership with the market adopting traditional financial products like digital asset securities, futures, options and exchange-traded funds and products.
Data from Coalition Greenwich data shows exchange-traded funds/products are favored by 61% of buy-side institutions, versus 27% for direct physical ownership.
Moreover, it said as liquidity-seeking evolves from request-for-quote (RFQ) to streaming prices and order books, fully decentralised exchanges have also emerged to offer new models and competition to exchanges, broker-dealers and alternative trading systems (ATSs).
“There are a seemingly countless number of firms moving in to fill the gaps for institutional trading of digital assets, such as trading platforms, prime services, market making, surveillance, analytics, custody, and settlement,” said David Easthope, senior analyst for Coalition Greenwich Market Structure & Technology.
Going forward, the report noted that the development of the digital asset market structure will be affected by the challenger for traditional institutions to hold spot crypto due its nature as a bearer instrument (making custody and security a challenge), as well as onerous capital requirements for banks.
“This next phase in the evolution of crypto market structure will be highly dependent on how market participants approach the breadth of digital assets, and how regulators balance investor protection and ensure market integrity, while also supporting technology innovation and the growth of deep and liquid markets,” says Easthope.
©Markets Media Europe 2021