I, Viktor Kochetov, CEO at Kyrrex, a digital wallet and professional cryptocurrency, discuss and explain common traits, distinctions and why this interaction is a win-win.
Cryptocurrency has come to change things once and for all. The advent of internet has created an entirely new dimension, and the new digital population now has children of its own. The crypto environment is quite young, but it has stirred quite a commotion during its decade-long history. It’s not about the tech framework alone: we are witnessing the rapid growth of qualitatively new community, with its own values, beliefs and socio-economic particularities. Community is the spine and support for healthy development of any industry. But in the case of crypto, the sentiment of classical financial moguls matters a lot and defines the pace in which the domain moves forward.
The high volatility of the crypto market has been discouraging classical market players from being engaged in it. Scam volumes, and their level of sophistication have scared them off. Price spikes and dramatic ups and downs dissuaded investors from approaching crypto. Nevertheless, the hearts of institutional investors seem to have softened: they are becoming more and more receptive of digital assets as we see positive dynamics in investments being made.
There is a lot of speculation on what the future holds for traditional finance and crypto: how much they are the same, what separates them, will they eventually collide. More importantly — to what extent is the juxtaposition rhetoric relevant?
Welcoming crypto to portfolio
Despite the fact that cryptocurrency is viewed as a risky asset, numerous studies suggest that it should be included into a traditional investor’s portfolio. Since the inception of bitcoin, its economic value has only gained magnitude. The huge potential is explained by the growing user base, and cryptocurrency going mainstream is now not that far away. Alternatives (and digital assets should be regarded as an alternative investment) are pretty common for balanced portfolios. In contrast to traditional assets, alternative investments are characterized by lower historical correlation. Simply put, crypto wins in terms of daily return. Thus, adding them to one's portfolio provides sound diversification. The high risks are justified.
Source: Costanza, Nicholas, "Cryptocurrency: The Argument for its Allocation Within the Traditional Investor's Portfolio" (2018)
In the chart above we see an example of a diversified investor portfolio. The suggested time span encompasses a seven-year period from 2011-2018, and this provides a holistic picture. By analyzing the variables for each specific asset in a given time frame, it is clear that bitcoin is prone to high volatility. At the same time, the return on bitcoins looks impressive as compared to other positions.
All in all, crypto investment is effective for diversification purposes, which in turn, helps yield positive returns. Moreover, an investor can protect themselves by hedging their positions in cryptocurrency so that digital assets become not as risky.
Divide between fiat and crypto
The first and the most obvious difference between traditional stock and crypto exchanges is that they trade different types of assets. Company shares traded on stock exchanges are the embodiment of a company’s equity: when you purchase a share, you join the company as part owner. In the context of cryptocurrency, the ownership depends on each specific cryptocurrency. Asset issuance is another aspect that draws the line between the two. An entity which is publicly traded, and liable to regulations and laws, may undertake asset issuance for financial reasons. Cryptocurrencies (the majority of them) have a limited number of coins/tokens.
Then there is maturity we should mention. The history of stock exchanges comprise two centuries, trading gold as well as the first analogs of price analysis date back to time immemorial. The maturity of the stock exchange market is reflected in trade diversity and high volumes and, therefore, gives birth to another distinction — market reach. It is a tough world; access is controlled and capped. Becoming part of it is a bit of a challenge. A crypto trader can do the job 24/7.
The crypto exchange landscape is young and green, taking halting steps without governmental backing. Yes, there have been steps toward regulation, however, this is a drop in the ocean: a tiny percentage of crypto platforms operate under jurisdiction. Stock exchanges are a harsh playing field where strict rules dictate the game flow. It is expected that pretty soon the regulatory question will be excluded from the list of major distinctions. Compliance with the law will filter the market from those who enjoy foul play.
Motives for mutual reinforcement
Both dimensions are driven by fear and greed and other similar features are already beginning to be felt. The young and rapidly developing cryptocurrency market follows the development pattern of the traditional market. At the end of the day it has to grow into a more mature form that will contain classical market professional features and its own identity.
Cryptocurrency exchanges are now undergoing a period of stabilization and regulation on the path to professional trading platforms. In the past, classical financial markets also evolved in the same evolutionary way. The difference was that the time period was longer and difficulties far greater. In this regard, crypto exchanges have something to look up to and, therefore, the transformation process has a chance of going more smoothly.
If we look at both markets, prices are driven by demand. When a trader wishes to sell for less, the price decreases. And the price will increase if a trader decides to pay more than the previous one. Many people argue that cryptocurrency should not be controlled by a centralized organ as this runs contrary to the initial idea of crypto — decentralization. However, in practice, many investors value digital assets in fiat. In addition, both stocks and crypto assets have the idea behind them which represents their real value.
There is a strong feeling that the crypto exchange industry is reinventing the wheel, and there is no need to do that. The algorithmic framework was developed and tested a long time ago. All that the crypto community really needs to do is adopt the experience of traditional stock exchanges to its exchange platforms. When developing our platforms we realized the necessity in bringing the fundamental principles of the classical financial market to crypto.
Financial giants breaking the ice
Nasdaq, Jamaica Stock Exchange, Boerse Stuttgart Group, SIX Swiss Exchange, and the London Stock Exchange are just a few traditional stock exchanges from the list that have started offering crypto products. This is direct evidence that conventional financial institutions are focused on benefits rather than threats, and are seizing the opportunity. By introducing cryptocurrencies, these farsighted market players can create an accessible and inclusive investment environment, support SMEs in raising capital via STOs. When a stock exchange offers transparent and regulated crypto trade and ensures its safety 100%, it inevitably finds its own niche and establishes itself as a market leader.
Nowadays, the professional cryptocurrency exchanges have developed an appropriate set of functionality which allows major players to enter this market. The near future will be associated with market consolidation, where only large platforms will remain, and cryptocurrencies irrelevant to the new requirements, will disappear. In parallel, we will watch new trading tools and trading options appearing in the market. These improvements will be dictated by the demands of institutional market participants as cryptocurrency and blockchain projects will sooner or later be their turf.
Along with the development of cryptocurrency derivatives, the line between classical platforms and crypto exchanges will also blur. More precisely, crypto websites will have to compete with their classical counterparts and undergo major changes for the consolidation and professionalization of their platforms.