Bringing institutional clients to cryptocurrency trading is predicted to have lucrative ramifications – and companies such as LMAX Digital are a step forward…
The news that a fully regulated London-based exchange is to offer the first physical cryptocurrency exchange has gone relatively unnoticed by the market at large.
LMAX, a foreign currency exchange, was founded in 2010. Its owners claim that $10 trillion of fiat currency has been traded through it to date, with institutional clients in over 100 countries. In a press release on 21 May, CEO David Mercer announced that the company would launch LMAX Digital.
It will offer 24 hours a day, seven days a week trading on the top five most established cryptocurrencies: Bitcoin; Litecoin, Ethereum, Ripple, and Bitcoin Cash.
And this is only available to institutional clients, not the general public.
Mercer noted: “We are furthering the legitimisation of the cryptocurrency market by offering institutions a platform on which to acquire, trade and hold cryptocurrencies securely with high quality, deep liquidity.”
The request came direct from LMAX’s current clients, Mercer said, “who desired a credible, efficient and trusted platform on which to trade digital currencies with like-minded institutions.”
The implication being, of course, that institutional clients will not simply HODL their cryptotokens forever on the chance that the price may someday go to the moon. Mercer added that LMAX Digital will soon clone its operations and launch in New York and Toyko “to meet demand from our clients globally”.
Bigger, badder, better?
Institutional traders, as opposed to individual or retail traders, have much more capital at their disposal. Here we’re talking about pension funds, mutual funds, insurance companies and ETFs or exchange-traded funds. While it was at one time impossible for a retail trader to compete with an institutional trader – through the latter’s pure size and buying power – the gap has narrowed in recent years.
The importance of the introduction of crypto trading for large institutions on a fully regulated exchange cannot be overstated.
Because LMAX has to comply with the rulebook of the UK’s Financial Conduct Authority, there is a vanishingly small chance – compared to LMAX’s cryptoexchange rivals – that investors will lose their money through security leaks or regulatory faux pas. But the frequency of news in the crypto space about new exchanges appears to have dampened investors’ excitement over LMAX Digital.
One crypto trader and investor, Cameron Brownlee, certainly thinks that. He said that “by launching the first physical cryptocurrency exchange, LMAX are making it easier for institutional investors to become familiarised with cryptocurrencies via a respectable trading platform in a fully regulated environment. Naturally, this also potentially opens up massive liquidity for the crypto market. This significance of this move has gone by relatively unnoticed by the market and crypto-specific media. The crypto space is inundated with announcements of new trading platforms, and it is often difficult for enthusiasts to scale significance of one new service over another.”
Brownlee is California-born and studied software engineering in Dublin and Sweden. After graduating, he rapidly found success in cryptocurrency trading.
Is LMAX the mainstream adoption that big business has been looking for? “Cryptocurrencies remain in their infancy,” says Brownlee.
“Until they become a practical alternative to fiat currency, they continue to be a speculative investment. Regardless, ease of entry for institutional investors is a necessary step towards mainstream adoption.
It is very likely to see other trading platforms setting up their own physical cryptocurrency exchanges. It seems almost inevitable at this point.”
And yet while it has been reported that the owner of the New York Stock Exchange is planning its own crypto trading mechanism , there are still few places where institutional traders can trade crypto with the security of an established exchange.
Institutions face the same problems as retail investors when looking at cryptocurrencies: their notorious volatility, for one. Diversifying your portfolio is a fundamental tenet of investment advice – and despite the fact that evangelists maintain it will eventually replace fiat, crypto remains a high-risk investment.
David Mercer believes that introducing institutional clients to crypto trading “will be a game-changer for the industry…[supporting] the transformation of the crypto market from the fringes to the mainstream”. He’s not wrong. It might even push the price of Bitcoin up to the $25,000 level that market evangelists have been promising. Note the word “might”.
Coinbase too basic to win
Coinbase is the best known and largest of the recent cryptocurrency exchanges, now with north of 20 million customers. Its rapid growth is referenced in the title sequence for HBO’s comedy drama Silicon Valley, where it appears alongside both established and up-and-coming tech companies like Facebook, Oracle, Twitter and Snap Inc.
On 15 May Coinbase launched a series of updates aimed at attracting institutional investors. These include Coinbase Prime, a suite of tools that institutional investors rely on when trading crypto.
General manager Adam White wrote in a company blog that “this product will fill a missing piece of critical infrastucture…over the course of the year we intend to offer lending and margin financing products to qualified clients, high touch and low touch execution services like over the counter trading and algorithmic orders…we will also introduce platform improvements like multi-user permissions and whitelisted withdrawal addresses.”
But with LMAX and other mainstream exchanges now moving to cut down Coinbase’s advantage, will it still reign supreme?
Cameron Brownlee thinks not. He argues: “Coinbase have established a strong first-mover advantage, but their target market currently seems to be casual investors. Coinbase do indeed have the liquidity to scale for institutional investment, but are based in the USA, which may lead to conflicts in regulatory practices. LMAX are providing a physical, fully regulated environment on British home soil, to which there is currently no alternative.”
David Mercer believes only regulated exchanges have the cachet to push cryptocurrencies into the mainstream. With intense and increasing interest from regulators and policymakers around the world about the risks posed by cryptocurrencies, it’s a solid bet that he’s right.