- Since 2016, crypto-hedge funds raised up to USD 1bn in end-investor capital in anticipation of positioning themselves to service institutional investor demand to gain access to cryptocurrency liquidity.
- But real-money demand to trade cryptocurrencies in 2018 has not yet materialised, presenting trading firms active in the USD 836bn market with a series of structural and regulatory maturity challenges.
LONDON – 4 September 2018 – A new, freely available report from GreySpark Partners, a leading global capital markets consulting firm, shows how key characteristics of the global cryptocurrencies trading landscape are now maturing to a level at which real-money institutional investors are becoming incentivised to actively place end-investor capital into the marketplace. However, institutional investor cryptocurrency trading interests are only represented in the overall crypto marketplace in 2018 by a small number of so-called crypto hedge funds, and real-money industry risk-taking activity is stymied by a lack of trusted cryptocurrency-centric custody offerings from established providers combined with a fragmented liquidity picture and a patchwork quilt of global regulatory mandates.
The report, Charting the Growth of Cryptocurrencies, profiles the key characteristics of the marketplace in 2018, showing how a multitude of brokers, infrastructure providers, technology vendors and trading firms are providing investors of all ilk with avenues to a diverse range of coin liquidity on a multitude of exchanges. For example, the report found that Bitcoin and Ethereum – which respectively represented 81% and 9% of the market share of cryptocurrency investment in 2016 – are now dwindling in stature. In August 2018, there were 14 different coins worth USD 1bn or more in market capitalisation representing 89% of overall cryptocurrency investment market share.
Despite growth in the number of crypto-coins available for investment, institutional investors are observed to be struggling to access secondary markets liquidity, in part because the number of crypto-hedge funds is small, with more than half of the firms employing fewer than 5 people. GreySpark estimates that there will be 160-180 active funds before the end of 2018, representing less than 2% of the 5,500 hedge funds trading in standard asset classes globally.
Meanwhile, in primary cryptocurrency markets, real-money companies often struggle to know where wisely to position end-investor capital. According to GreySpark’s research, nearly 50% of the 890 initial coin offerings launched since 2014 failed to raise any money. However, data from Binance and Bitfinex shows that the number of ICOs with positive returns over a six-week period is decreasing from 45% to 25%, but – within that same period of time – the level of returns within successful ICOs typically increases, on average, to close to 40%. GreySpark believes that this trend will continue to grow as fewer ICO projects manage to find a sweet spot in creating traction within their user bases.
From a crypto-coin mining business model perspective, the report also shows that while the majority of the mining industry is focused on targeting retail investors – for example, offerings from companies like Bitmain – there are also now companies that focus specifically on garnering high-net worth individuals and corporates as clients. Businesses such as BitFury offer customers the opportunity to operate their own mining activities either in the form of managed services agreements, or through the purchase of hardware stored in containers, making it easy to move and set up operations based on energy costs and regulation.
William Benattar, GreySpark Head of FinTech and lead author of the report, said: “In many ways, last year’s surge of interest in cryptocurrencies was very positive for the market. It not only contributed to raising awareness and attracting the attention of governments and regulators, but the magnitude was so high that it also acted as a huge cash injection across all segments; exchanges, market–makers, miners and funds all benefitted from it. Months and, in some cases, even years of runway have been amassed by those businesses, giving the industry the power it needs to innovate and turn what was economic manna into something sustainable. Cryptocurrencies have become a new asset class and the red carpet is being rolled out for large institutions to join in.”
Eitan Galam, Mayan Capital CEO and report co-author, added: “Financial institutions have started to engage, although carefully, with their first cryptocurrency-related projects and the whole industry is evolving rapidly with the clear objective to attract the big money. In parallel to that, the blockchain industry still offers a lot of opportunities for people who manage to understand the current market stakes and trends”
For further information and to purchase copies of GreySpark’s research, please visit greyspark.com/research or e-mail research.reports@greyspark.com
Notes to Editors & Reporters
About this report – Charting the Growth of Cryptocurrencies
- The research underpinning the analysis in the report was assembled over an eight-week period spanning June 2018 to August 2018.
- The report represents the combined efforts of GreySpark’s Fintech Advisory & Strategy Team and the Capital Markets Intelligence practice, as well as contributions from Mayan Capital CEO Eitan Galam and former B2C2 Vice President Emmanuel Alamu.
- The report contains 44 figures and tables.
- In addition to the source notations for each of the figures in the report, other data points in the report related to information on the cryptocurrencies landscape and market participants were sourced from formal and informal interviews with individuals working at:
- 5 investment banks;
- 10 brokerage firm OTC trading desks;
- 5 cryptocurrencies market-making firms; and
- 10 cryptocurrencies retail trading and investment firms.
- Additional GreySpark Partners research publications related to the cryptocurrencies market include:
- Cryptocurrencies: Navigating the Wholesale Trading Landscape (2018)
- Cryptocurrencies: Understanding their Cyber Security Risks (2017)
- Cryptocurrencies in Asia: Early Regulatory Responses (2017)
- Assessing the Cryptocurrency Investment Landscape (2017)
- Enhancing Securities Settlement Systems (2017)
- The Blockchain: Capital Markets Use Cases (2016)
- Why Finance Professionals Should Care but be Cautious about the Blockchain Technology (2016)
About GreySpark Partners
GreySpark Partners is a business, management and technology consultancy specialising in capital markets e-commerce, e-trading, risk and risk management advisory. GreySpark works with global and regional investment banks, buyside and private equity firms, and technology and data vendors to deliver solutions that work across all asset classes. For further information, please visit: www.greyspark.com
