Crypto Exchanges’ Average Lifetime of 1.5 Years has Large Investors Driven to Onshore Exchanges unlike Traders with High-Risk Tolerance

  • 1.1 mil BTC have been lost/stolen from exchanges shutting down
  • This time greater influence from institutional investors
  • First time the stars have aligned

Bitcoin seems to be putting the crypto winter far behind us as we make new 2019 highs. Currently, BTC/USD is trading $9,311 with 24 hours gains of 1.49 percent and continues to move higher.

This uptrend started in April, exploded in May, and is now continuing in June.

As the cryptocurrency surged in value, bigger investors from trading firms to hedge funds have turned to exchanges. Recently, Bitwise released a 104-page long report claiming 95 percent of the reported volume on cryptocurrency exchanges is fake, with only 10 exchanges having real trading volume.

Bitwise that analyzed economic and no-economic trading of more 83 evaluated exchanges revealed that 73 of the exchanges failed at least one of their tests for the real trading volume.

Meanwhile, the average lifetime of a crypto exchange is around 18 months and their shutdown has resulted in the loss of more than a million Bitcoins.

“Greater Influence from Institutional Investors”

Meanwhile, big investors are buying Bitcoin futures to gain exposure to the asset.

“It's a useful hedging instrument,” said Daniel Matuszewski, head of trading at Goldman Sachs-backed crypto firm Circle. “Futures are much easier to trade, much easier to use for hedging, much easier to get leverage on.”

Just last month we saw Chicago-based CME Group recording highest level of daily trading volume of futures contracts and surpassing $1 billion in notional value. The number of open interest contracts, those that haven’t been settled, also hit a record.

Bitcoin’s price gains and the subsequent increase in the volatility attracted new investors that are seeking to hedge risk, said CME.

While referencing the Bitwise report JPMorgan strategists led by Nikolaos Panigirtzoglou recently wrote in a note to its clients that “the importance of the listed futures market has been significantly understated.”

“The overstatement of trading volumes by cryptocurrency exchanges, and by implication the understatement of the importance of listed futures, suggests that market structure has likely changed considerably since the previous spike in Bitcoin prices in end-2017 with a greater influence from institutional investors,” said JPMorgan.

First Time the Stars have Aligned

While large investors area heading to regulated platforms in financial hubs like CME Group, traders with more tolerance for risk use offshore exchanges.

Offshore exchanges have been offering bitcoin futures since as early as 2011. BitMEX is one the biggest offshore exchanges that now accounts for more than 65 percent of global cryptocurrency derivatives trading.

BitMEX registered a trading volume of $4.3 billion in May but its CEO Arthur Hayes said, large investors are increasingly drawn to onshore exchanges like CME.

“It's the perfect product (for bigger investors) – it's U.S.-dollar based, they never have to touch actual bitcoin, it's financially settled,” he said.

CME futures, however, have thin liquidity and high barrier to entry. The growing gap for futures from onshore exchanges is now stimulating competition and attracting new entrants like ICE.

For some time, compliance-wary institutional investors had been assessing futures offered by regulated exchanges as they awaited jump in prices, Shui Chung, head of crypto pricing products at Crypto facilities said:

“This is the first time those stars have aligned.”

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