As someone who worked in fintech before crypto I’ve always found the differences in nomenclature between these two related sectors to be intriguing. In fintech we talked about consumers and users. In crypto it’s far more common to refer to retail participants as traders, investors or owners.
Matthew Homer, a CoinDesk columnist, is a VC investor and advisor to founders in the crypto space. He previously served as executive deputy superintendent at New York State Department of Financial Services.
I suspect this is due to several factors, but the one I’d like to focus on here is that crypto blurs boundaries. Because it can be seen as both infrastructure as well a representation of value crypto is different from what we’ve seen before.
Is the retail individual who occasionally buys and sells crypto a trader? Or is that person an investor? Or something else entirely? Noelle Acheson (the former CoinDesk head of research) does a good job breaking down what it means to be a trader in her recent “Trading Week” piece, so I’ll avoid offering any definitions.
My point is broader, crypto is definition resistant. It’s hard to pin it down as any one thing in particular. Just take the range of exchangeable assets themselves. Depending on what you're looking at, crypto has elements of commodities (like oil and gold) and securities (like stocks and bonds) as well as cash itself.
But will this polymorphic state persist or will the space eventually conform to a set of neatly defined terms, whether existing or new? I don’t know. But however we might define crypto trading (especially by the average person), there are four big questions that will shape how people are able to interact with these “assets” in the coming decades.
Who can trade?
The first question is, who will be allowed to buy or sell? There’s a lot to unpack with this question, including how the asset is regulated, where the purchase or sale takes place, etc. The question really is whether any additional rules or regulations will be put in place beyond what exists today to restrict/favor some individuals over others from buying or selling these new types of assets.
In a space that continues to evolve and calls for increasing consumer protection, principles like suitability (similar to rules defining who is a “qualified investor” in traditional investing) could apply. One effort to watch is that of Commodity Futures Trading Commission (CFTC) Commissioner Christy Goldsmith Romero, who has signaled she’s interested in changing the definition of what it means to be a retail investor.
Where is crypto traded?
The second question is where is buying or selling allowed to occur? One of the most significant developments of the most recent bull market was the adoption of crypto by noncrypto-native companies. Five years ago, if you wanted to buy crypto you’d need to set up an account with a crypto-specific institution.
Today it’s possible to buy and sell crypto within many traditional fintech apps. This is significant for the crypto-curious, enabling anyone with an app like PayPal, Venmo or Square (which is a lot of people) to buy and sell on a platform they already know and trust. While the trend is toward embedding crypto into more and more non-crypto platforms, will regulators allow that to persist?
Commodities or securities?
The third question is the one that gets the most attention and therefore the one I’ll focus on the least here. That’s the question of what can be traded. Is the asset a security (like stocks and bonds), a commodity (like gold or natural gas), something in between or something entirely different? As we all know this is a matter of serious debate and, of course, it will depend on the specific asset in question.
Diminishing trading fees
The final question is how could the competitive landscape shift with greater fee competition and reduced trading volumes? Binance created a stir this summer when it announced it was eliminating trading fees on BTC. Then, a few weeks later, Coinbase responded saying it has no plans to follow suit.
In one of its recent Securities and Exchange Commission (SEC) filings Coinbase reported that “trading volume decreased 53% and 34% for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021, respectively,” which is significant for a firm that derives so much of its revenue from fees.
See also: Why Trading is Essential for Crypto | Opinion
Lowered trading volume combined with downward pressure on fees will push trading platforms to find new sources of profit, but what will those look like? The answer to this question likely depends on how long trading volume is depressed and whether exchanges feel the need to lower fees in order to attract new users or more volume. There are several possible business model outcomes in response to these dual pressures.
New business models
While people have been speculating about the impact of fee compression for a while, it’s possible business models would change very little if fees went to zero but similar profit was built into the spread on each trade. This might not be so different from what we’ve seen in the traditional brokerage space.
Read more: Technical Analysis Is Dead, Long Live Transaction Analysis | Opinion
We could also see exchanges add on ancillary products or services. Just as brokerages have added their own branded products like exchange-traded funds (ETF), crypto exchanges seem interested in their own branded stablecoins. A natural evolution from there is the full suite of financial services and products, ranging from credit and debit cards to transaction accounts.
Further afield, but certainly within the realm of possibility, are products and services more commercial in nature but adjacent to financial services. Imagine StubHub for non-fungible token (NFT) tickets or loyalty rewards programs for Web3 merchants.
Companies will undoubtedly pursue different strategies and, in that the boundaries will continue to blur. And as exchanges and platforms diversify their offerings, what constitutes “trading” may become even less clear than it is today.
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