Crypto Trading: Risks and Solutions for Retail and Institutional Traders
Cryptocurrencies aren’t a new phenomenon. Everyone has heard of digital assets. In recent years, some countries have imposed restrictions, while others have accepted cryptocurrencies as legal tender. The crypto industry has become so common that more retail investors and large market players are entering the market. Still, risks related to regulation, security, and market liquidity exist for retail and institutional traders, which prevent them from fully trading.
Why Is the Cryptocurrency Market Still Risky for Traders?
Bitcoin was launched in 2009. Since then, more and more traders have been entering the market. The attractiveness of cryptos has led to a growth in the number of cryptocurrency exchanges and brokerage firms. Although it’s been over a decade since Bitcoin was launched, the reliability of brokerages remains questionable.
Brokerage firms allow traders to buy, sell, and exchange cryptocurrencies through a single platform, which is supposed to ensure a high level of security and effectiveness of trade execution. However, this is not entirely true. Most brokers provide derivative trading, including contracts for differences (CFDs), meaning traders cannot own digital assets. Additionally, some brokers manipulate trade orders and offer bid and ask prices with their own spreads.
Traders, whether retail or institutional, should also be aware of the lack of regulation in the overall cryptocurrency market. While some countries are working on legal, tax, and regulatory frameworks for cryptocurrencies, many have yet to finalize their policies. This creates an environment where unscrupulous brokerage firms can thrive, particularly in jurisdictions with little or no cryptocurrency trading regulation.
The lack of regulation creates issues such as unlicensed brokers and a lack of deposit insurance. Only a few traders pay attention to the information about deposit insurance that the firm provides. However, this is one of the key aspects traders must consider before depositing funds. Without insurance coverage, traders risk losing their funds if the company goes bankrupt or its assets are stolen.
Aside from this, there is another issue traders do not suspect. Some brokerage firms provide agreements, saying that by depositing funds with them, a trader grants the company the authority to use, invest, or transfer their funds. Such an agreement treats the client as an unsecured creditor, which allows the company to not return funds if they go bankrupt.
Security is another significant issue in the cryptocurrency market, with hacking being a prevalent problem. Only a few brokerage firms can provide a high level of security that protects their clients from fund loss or identity theft.
The trade execution process is also a challenge for traders in the cryptocurrency market. With over 1,000 exchanges of different sizes, it’s challenging to choose one reliable exchange with a high level of protection.
The recent case of FTX, a successful crypto exchange with over 1 million users and one of the largest trading volumes, going bankrupt in November 2022, serves as a reminder of the risks involved. The collapse occurred due to a problem with the liquidity of FTT, FTX’s native token, and the lack of collateralized assets. The company could not cover customer demand when it faced enormous fund withdrawals.
In addition, liquidity issues can cause significant slippage and price differences between platforms. The level of liquidity determines how difficult it is for a trader to buy or sell an asset at a stable price on a given market.
Are There Solutions for Institutional and Corporate Traders?
The strong bull run in the cryptocurrency market began in 2017 when Bitcoin managed to stick above $1,000. Since then, the number of fund investments in cryptocurrencies has increased significantly.
The market needs institutional and corporate investors, as they can bring significant capital, increasing its market capitalization dramatically. According to the analysis by Morgan Stanley conducted in 2021, institutional investors and limited partners account for over 85% of the trading volume of the U.S. stock market. However, institutional investors face even more limitations in the cryptocurrency industry than retail traders due to higher security requirements and the market execution process.
Like retail traders, institutional investors consider regulation the most important aspect when choosing brokerage firms to enter the cryptocurrency market. The cryptocurrency market is known for manipulation and unethical practices, including wash trading.
Moreover, institutional investors have difficulty meeting know-your-customer (KYC) and anti-money laundering (AML) regulation requirements due to decentralization, one of the key principles of blockchain. This technology makes it impossible to identify the other party in a trade.
Protection of institutional investor funds can barely be fulfilled by the brokerages available in the market. Mostly, weak technical solutions are the reasons for firms’ inability to prevent hacking attacks and money loss.
Although a vast number of exchanges provide different products and services, including centralized order books, custodial storage, lending, alternative investment instruments, NFT, contests and bonuses, crypto payment cards, and project crowdfunding, with their own interfaces and requirements, they operate in jurisdictions with low legal frameworks and non-transparent legal responsibilities.
Another issue related to the wide range of firms is the low level of user experience. Different interfaces, wallets, instruments, and APIs make trading even more time-consuming. Also, whales experience a high entry threshold. Hardware wallets, protocols, screeners, and portfolio trackers require significant funds for setting up trading processes. When working with different exchanges, institutional and corporate traders do not have a single interface to organize information, so they have to use spreadsheets or third-party web services, which also increases operating costs and negatively affects the level of security.
Fiat transfers are a limitation that both retail and institutional traders face. While retail traders can find ways to deal with fiat, such as using P2P trading, larger investors have a limited number of options for fiat payments in banking systems. However, the market is developing along with regulations and brokerage firms. There are already companies that can solve most of the crucial issues of the cryptocurrency market.
Who Can Help Institutional and Corporate Traders?
Single Broker is a financial institution that combines brokerage services and a trading platform and enables institutional and prop traders to manage digital assets on different exchanges through one interface.
Single Broker is a Swiss-based and regulated company. It stores cryptocurrencies and fiat funds in a reliable jurisdiction and provides custodial storage with insurance coverage for any client. Traders access cryptocurrency instruments within the platform’s framework and a closed wallet system. Funds are transferred between exchanges and trading accounts from a single interface, a closed secure infrastructure of segregated custodial wallets and exchange sub-accounts, which guarantees additional protection.
The platform enables access to cryptocurrency trading on various centralized and decentralized cryptocurrency exchanges, and DeFi instruments, including staking and liquidity pools, OTC platforms, and aggregated liquidity. However, more importantly, a client can access all instruments via a single platform. This means that traders do not have to deal with different APIs and interfaces, register on different trading platforms, and deal with third-party terminals to manage API keys.
Unlike most cryptocurrency brokers, which only aggregate liquidity, Single Broker creates an independent sub-account on an exchange that the client chooses and grants the client direct access to it. Traders can execute trades directly, without spreads and hidden commissions. Furthermore, the problem of fiat transfers is solved by Single Broker, by allowing deposits and withdrawals using fiat currencies.
In conclusion, despite skepticism, the cryptocurrency market will continue to grow and develop. However, this does not necessarily mean that the number of professional and reliable brokers will increase. There is still a risk of a surge in the number of unscrupulous brokerage firms. Therefore, traders must be cautious and choose brokers that prioritize security and regulation.