Cryptocurrency trading revenue to double this year

Cryptocurrency exchanges are likely to record a double revenue income to as much as $4 billion in total by end of this year from the current level of $2 billion, so says Sanford C. Bernstein & Co. analysts who released a report about the state of cryptocurrency trading.

The report named “Crypto Trading -- the Next Big Thing is Here?” derives the estimates of the revenue generation based on transaction fees. It says trading is the next big thing in cryptocurrencies even as the cryptocurrency prices suffered some shocks earlier in the week with Bitcoin breaking a previously held yearly low of $6,000 and Ethereum going below $300.

The largest cryptocurrency exchange earned a total of $1.8 billion of fees from buying and selling of cryptocurrencies last year. This was eight percent of the revenue generated on traditional exchanges. Only the global cash equities surpassed this amount in terms of segments. Hence it reveals the potential cryptocurrency trading has.

The analysts compared the cryptocurrency average daily traded volume over 30 days with major traditional segments showing tat cryptocurrencies generated a total of $17.0 billion compared to U.S corporate debt which traded $28.0 billion, European equities which traded $50 billion, U.S. equities that traded $307 and U.S. treasuries that traded $466 billion in the last 30 days.

The report adds that there are a plethora of opportunities for traditional firms including in custodian, asset management and market-making services even as the crypto-asset class seasons and institutional demand builds up. The analysts say that Coinbase crypto exchange, which enjoys as much as 50 percent of the transaction revenue pool, may end up with “unassailable competitive position” unless Wall Street becomes more engaged beyond the cautious approach they are taking to get in citing concerns over regulations and money laundering.

Volatility has also been and still is a major concern for cryptocurrency adoption and its attraction of new investors. While many firms have taken a cautious approach, Goldman Sachs Group Inc. to JPMorgan Chase & Co. have already ventured into cryptocurrencies.

Thus with continued entry, the demand for cryptocurrencies by institutions is increasing opportunities to trade, but probably not for the individual trader given how the markets have been so far this year even with entry of Bitcoin Futures in the end of last year.

When, is a pressing question

The report supports the recently commonly held view that institutional momentum is currently building up with continued entry into crypto markets, something that could both propel and sustain prices in future. For instance, cryptocurrency prices largely rely on new entrants that push demand higher.

And even a growth momentum propelled by increased entry of institutional investors may also be constrained by a number of factors. For instance, the growth in value that pushes up prices may be delayed in a few more months given the prolonged "natural correction" of the market following massive price surges in end of 2017. 

Another factor would be regulation, with regulators keeping a keen eye and at times forcing a cold market -- another wave that discourages growth given recent closing down of some crypto exchanges in places such as China.

Again, regulation is likely to trim off pumps and dump effects now more than any other times in the past even as investors continue to understand this class of asset, forcing a situation where prices rely on growth of cryptocurrency projects, adoption, entry of new investors, usability, etc. Therefore the probability of another wave of short massive price increases as seen end of last year grows dimmer as market settles to shift focus from pumps and dumps.

Therefore, maturing of individual cryptocurrency projects in which ICO money is invested will also determine the long term momentum, which is likely in future as a very large number of the projects are still in infancy, trial or very very young stages. That would be very important for the crypto community because it would increase adoption and usability of cryptocurrencies in general. Patience and sobriety should be called. This factor would work hand in hand with entry of more institutional investors to push up mainstream adoption and hence value.

That would take time.

A study released last month by Imperial College and U.K. trading platform eToro said that Bitcoin and other cryptocurrencies could go mainstream as payment instruments in a decade, stating that cryptocurrencies are the "natural next step" for money. Which is true considering the current growth in digital economies and transactions around the world, and it is clear to many people that digital economies are and will be irresistible. The "better" currency on which these economies rely on in future may be cryptocurrencies or some other digital version of fiat. Already a lot of this is happening and will obviously take place little by little -- sometimes it would be hard to notice the certain day when that finally happens. Yet an advanced digital economy would better meet cryptocurrencies at an already tried and tested position to assure a good share of the currency markets.

One of the greatest strengths of cryptocurrencies is the ability to streamline cross-border payments and to make them very affordable and instant -- and speaking of adoption, the study by Imperial College and eToro said this strength alone could propel their adoption world-over. Yet building on that strength to make them viable for future economies still requires a lot of work and time.

If there is one revolution cryptocurrencies will be fueling is the money revolution starting with the now continued debate on whether they meet the characteristics of a currency and what could they look like in order to meet those characteristics. Because that debate would be essential for what constitutes the "currency of the future." Then they bring on decentralization aspects in money and change all that we thought financial systems and financial assets were or are supposed to be.

Imperial College and eToro said in the study that cryptocurrencies meet one of the fundamental principles of fiat money by acting as a store of value but do not meet the other two requirements to act as a medium of exchange and serving as a unit of account.

Moving forward, the study says cryptocurrencies will need to solve the challenges of scalability, usability, regulation, volatility, incentives, and privacy (and security including by crypto exchanges) so as to meet the other two requirements. Therefore, if there was any work for cryptocurrency projects and teams in the space to help with to achieve growth and improve mass appeal to encourage mainstream adoption, then tasks would already be defined.