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LeapRate Exclusive Interview… Virtually (no pun intended) every day we have been seeing some forex broker or another announce something to the effect of “Now you can trade Bitcoin / Ethereum / Dash / Ripple with us”.
Not exactly news any more, but it certainly highlights the increasing interest both retail brokers and traders have in digital currencies.
But how about the other side of the equation? How can brokers go about the important task of risk management and liquidity when it comes to cryptocurrencies?
We’re pleased to speak today with Arthur Azizov, CEO of B2Broker, a liquidity provider and developer of complex solutions for brokers. Arthur shares his opinion on the current state of the cryptocurrency market and dwells upon the digital future that awaits.
LR: Hi Arthur, and thanks for joining us today. Can you first give us some perspective, about the rise of blockchain, bitcoin, and cryptocurrencies?
Arthur: In 2008 at the dawn of the global financial crisis, just as Lehman Brothers lay dying, a fully digital asset based on the blockchain technology, bitcoin by name, was born.
At first bitcoin was adopted mainly by computer geeks and drug dealers. Later on, speculators joined the game. Now bitcoin is all over the place: on TV, in blogs and mainstream media. Investors are divided into those who consider it a financial pyramid, and those who believe that the future belongs to the digital money. In any case, there is no one left unmoved.
LR: Trading volume of cryptocurrency now exceeds $1.5 billion per day. What is your view on the role that cryptocurrency plays in the modern world? What will happen to it in the near future?
Arthur: I’ll put it simply: blockchain is a revolutionary technology, in terms of significance comparable with the Internet itself. While cryptoeconomy will become at least 20 times bigger within a couple of years.
The idea of a distributed registry first appeared in the 1950s, but its explosive development began only with the advent of bitcoin in 2008. But if then it was the niche thing, now it is discussed by presidents and studied by central bankers. Since the beginning of the year, the number of search queries for the “blockchain” keyword has grown 11 times and exceeded 8 million per month, and the fun has just begun.
The same is true for bitcoin. Since the beginning of the year, bitcoin has risen by 168%, while the capitalization of the entire crypto-currency market has doubled in half a year and now amounts to about $110 billion. And this is not the limit. It will continue growing for several years before the hype abates.
There are about $200 trn circulating in the global economy. If at least 1% of this money transfers to the digital economy, bitcoin and other popular cryptocurrencies – Ethereum, Dash, Litecoin – will grow 20 times. Based on the current trend, bitcoin may pass 10,000 thresholds within a year.
Let’s move on. The capitalization of the derivatives market that includes forex, forwards, CFD, amounts to $1.2 quadrillion. That’s a huge amount. If we treat the digital currency as the derivative, then in terms of scale the crypto-economy may be comparable to the whole global stock market. This is a new world with new technologies, new exchanges, and new brokers. This is the future that has already come.
LR: Do you feel the demand from the market for cryptocurrency?
Arthur: Demand for cryptocurrency is already many times higher than the supply and it continues to grow exponentially. There are three factors at work.
First, it’s the hype on the verge of mass hysteria. Media put the wind in cryptocurrency sails as hardly a day goes by without a bitcoin hot story.
Second, bitcoin is considered as a means of saving, especially in Asian countries, where bitcoins are bought not only by professional investors but also by students, housewives, and pensioners.
Third, governments have become interested in cryptocurrency: Putin discusses the vital problems of Ethereum with Vitalik Buterin, and the Deputy Chairman of the Central Bank hints at the creation of a cryptoruble; Kazakhstan intends to launch a blockchain-based platform in the second half of 2017, while the National Bank of Ukraine is preparing to release an electronic version of hryvnia. Japan has already recognized bitcoin as an official means of payment on par with the yen. Starting from next month 16k of retail outlets in Japan will accept bitcoin. Ten cryptocurrency exchanges have already applied to the Financial Services Agency of Japan (FSA) for a license. By the way, B2Broker also plans to apply to the Japanese regulator in the nearest future. In other words, cryptocurrencies are becoming legal, and as soon as this happens, their appeal will grow even stronger.
People want to buy bitcoin, ethereum, litecoin, dash, but they face problems from the very start: first, you need to take pains to transfer the fiat money to the account at the cryptocurrency exchange, and then to take even more pains to get them out. Banks are reluctant to work with companies in this segment due to high risks and lack of regulatory base. In this regard, brokers have a million to one chance, the rare opportunity to take up an empty niche. Now you may start a business and be among the lucky ones that will skim the cream off.
LR: What is cryptocurrency liquidity?
Arthur: Generally, cryptocurrency liquidity fits under the general definition – it is an opportunity to buy or sell digital assets in the desired amount. So, cryptocurrency liquidity is scarce.
There are about 150 exchanges engaged in cryptocurrency trading, while only the first 50 have decent volumes. It means that there is no competition, no incentive to improve services and trading conditions. Funds deposit and withdrawal limitations coupled with immature services slow down operations, fast-growing demand is left unsatisfied. If you want to buy bitcoins as easy as goods on Amazon, there should be at least 1,500 cryptocurrency exchanges, not 150.
In margin trading, the situation is no better. More than 60% of investors perceive bitcoin as a source of speculative income. They want to buy it today only to sell tomorrow and pocket the price difference. Open the position – close the position – there’s your profit. They do not need physical delivery. But if, say, EURUSD liquidity allows you to trade any volumes, BTCUSD liquidity will put limitations on your ambitions. There are about 7,000 forex brokers and only 10-15 of them offer cryptocurrency trading. There is an abyss between a tiny market and enormous demand.
In this respect, B2Broker is the only company that professionally sets up cryptocurrency brokers and, in fact, creates liquidity in this market.
LR: How do you connect to cryptocurrency liquidity?
Arthur: To connect cryptocurrency liquidity, you need to take three steps: 1) pass the compliance test, 2) accept the terms of the agreement, 3) deposit the account in cryptocurrency or by bank transfer, and here you go.
Technically, the process is simple. B2Broker has created B2B X, the cryptocurrency liquidity aggregator that combines the liquidity from five of the biggest exchanges. We plan to increase the number of exchanges up to ten. They create the liquidity, while B2Broker provides it to everyone. We connect МТ4/МТ5 brokers for free through ready-made bridge technology. Though you can connect any platform using FIX API.
The exchange is already operating, but officially it starts on August 1. Currently, there are 35 brokers in our portfolio. They will get access to the aggregator and begin to offer cryptocurrencies to their customers. We plan to connect at least 200 brokers until the end of 2018, and thus become the largest aggregator in the industry.
B2Broker focuses primarily on brokers, but anyone can open an account and trade cryptocurrency, including banks, hedge funds and even private investors who can afford a minimum deposit of $10,000.
LR: For FX and CFD brokers, is it worth connecting to cryptocurrency liquidity and offering cryptocurrency trading?
Arthur: Sure, and there is no doubt about it. I’ll give you two key reasons for that.
1. Fantastic popularity and growth potential. Cryptocurrency is characterized by deep corrections and high volatility, and yet in the next few years, it will inexorably rise against the background of legalization in the largest countries and the widespread use of blockchain technology.
2. Great commissions and lack of competition. The foreign exchange market is oversaturated, brokers have to compete at the price level, hence the narrow spreads and low commissions. Among the 15 largest exchanges, the commission varies from 0.2% to 0.5% of the volume traded. This means that the medium-sized exchange with an average daily turnover of $500 million per day earns a minimum of $1 million in commission. This market will remain very attractive for a long time, even though new players will emerge here soon, competition will grow, and commissions will eventually decrease.