We are in a crypto winter. Bitcoin lost around 58% of value in the second quarter of 2022 and around $1.2 trillion has been wiped off the entire cryptocurrency market. With private and institutional investors experiencing substantial losses, regulators are paying close attention and crypto regulation has been increasing across the globe, especially in the US. Despite the plummeting valuations and exchange closures, crypto will survive the winter, and regulation – far from stifling the innovation that the sector has become known for – should bring much-needed confidence for new existing and new entrants which can only be a good thing. And of course, when markets fall, they present buying opportunities for investors willing to play a long game, a strategy better suited to established players in traditional financial markets.
Regulation is coming
A common worry in the industry is that once regulators and additional technology get involved in the crypto ecosphere, innovation will slow down. Regulation is inevitable – the IMF has said crypto assets are no longer niche and regulators need to catch up. The European Central Bank has urged eurozone countries to harmonize different rules around crypto regulation before EU-wide laws come into force and the end of 2023. The US is also pushing for more regulation, with the US Treasury encouraging new laws to address crypto regulation gaps.
When you strip everything back to its bare essentials, the fundamentals behind trading crypto are similar to how traditional financial markets operate. Introducing regulation will bring greater stability, security, and efficiency which it can be argued will lead to more, not less, innovation, competition, and choice. Better oversight and governance will also further strengthen its role as an additional form of currency, silencing the doubters who say it is like the wild west. Ultimately, it’s all about giving choice and security to both existing players and new market entrants.
Better analytics: the catalyst for crypto’s longevity
Alongside the need for stronger regulation is the need for better analytics and again, technical experience and understanding gained in traditional financial markets can be deployed to great effect here too. Surprisingly for a sector that has cultivated an image of being fast and furious, crypto trading isn’t as high speed as many people would imagine. Scratch the surface of the slick front-office exchanges and underneath is a patchwork of blockchain technology, much of which is quite clunky. The risk of fraud through market manipulation between pricing and settlement is high, and firms will need to deploy tried and tested technologies and procedures to identify and stop such transactions.
There is an advantage here for firms entering crypto from traditional financial markets in that knowledge gained in deploying analytics technologies for market surveillance and fraud purposes will not only be directly applicable in the crypto space, they will also help firms gain a rapid and deep understanding of the how these de-centralized markets operate.
By their design, these markets are far more distributed and changeable than other more established markets. While actual transactions may not be as fast as other asset classes, the pace and evolution of the sector is considerable. R&D cycles and turnaround times for new product development need to match the pace of the market and for that, firms need an analytics stack that can deal with the huge volumes of data being created. Surveillance platforms have been built to do just that, capturing, processing, and analysing vast amounts of data in a variety of formats, created by a myriad of systems and market players. Applied to crypto they can help firms analyse the market better, test and deploy custom proprietary pricing, hedging, and trading strategies while managing the associated risk in real-time.
Preparing for when the ice melts
There are signs that the crypto winter is coming to an end and with it a growing level of maturity that will be welcomed by regulators and investor alike. A recent Bloomberg article reported high-ranking resignations of crypto founders famous for ‘bombastic’ personalities and social-media feuds with competitors and skeptics. In their place are coming more moderated, experienced executives from the world of traditional finance.
We certainly believe that the market will stabilize. While increased regulation will be crucial it shouldn’t be seen as the only driver of stability. Adoption of tried and tested technologies and processes that have enabled traditional financial markets to grow and innovate can and should prove transformative in crypto if firms adopt them.
About the author: James Corcoran is the Chief Growth Officer of KX. His background is in financial services with a track record of implementing high-performance trading and analytics solutions for many of the world’s largest capital markets institutions.