Finery Markets and Cointelegraph have published a joint report on the institutional crypto OTC space. The report is based on an in-depth survey of liquidity providers, market makers, and prime brokers.
Some key takeaways include:
- 54.6% of firms plan to increase their AI spending by 5–30% in 2025.
- 42% of institutional players now incorporate digital assets into their day-to-day business activities.
- 92% of firms plan to secure additional licenses in 2025, with Singapore, Switzerland, and the UAE leading as crypto-friendly jurisdictions.
- Europe saw the highest demand for institutional crypto trading.
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Introduction
Crypto is probably the most fragmented asset class in the history of electronic trading. Crypto markets facilitate interactions between traders by bringing them together through various electronic trading services, including on-exchange and off-exchange execution.
Each trading venue, centralized or decentralized, operates with a specific market structure (or trading mechanism), which is a set of trading rules that govern participant interactions.
It determines the actions they can take, their information about other market participants’ actions, and the protocol for matching buy and sell orders. As reported by CoinMarketCap, there are now over 700 spot crypto venues worldwide, underscoring the extensive fragmentation within the crypto market landscape (as of November 2024).
Market structures play a pivotal role in shaping various market characteristics, including:
- Liquidity
- Transaction costs
- Pricing dynamics
- Volatility
- Trading profitability
All of these parameters significantly impact trading strategies. Each market structure profoundly influences both market efficiency and quality.
In the crypto markets, both centralized on-exchange trading and decentralized exchange (DEX) trading offer valuable insights into market size through metrics like average daily trading volumes. However, the crypto Over-The-Counter (OTC) market poses a distinct challenge due to its lack of transparency and the absence of a centralized data repository.
Source: Finery Markets
This report delves deeply into the institutional OTC crypto market, aiming to quantify the level of activity within this segment.
Section 1: Market state - United in Fragmentation
Market fragmentation in the crypto space is a complex phenomenon driven by various factors, including technology, competition, regulatory landscapes, and evolving market structure. This fragmentation significantly impacts key market characteristics such as liquidity, transaction costs, pricing dynamics, and volatility.
A paradoxical situation arises when comparing consolidated and fragmented markets:
- Consolidated Markets: Foster competition among traders for optimal pricing.
- Fragmented Markets: Encourage competition among market venues and price discovery centers to offer low-cost services.
Consolidated VS Fragmented Markets
This dichotomy creates a tension between two forms of competition. While competition among trading venues can drive innovation and potentially reduce service costs, these benefits might often be outweighed by increased complexities for traders, higher costs associated with seeking the best price across multiple venues, and challenges in navigating different execution types.
For instance, a study by Acuiti and BSO found that 57% of crypto trading firms were looking to increase the number of venues they trade on, indicating a trend toward further fragmentation. This can lead to liquidity being spread thin across multiple platforms, potentially impacting market efficiency.
Fragmentation in Crypto Markets
The crypto market is already characterized by extreme fragmentation, with over 700 trading venues globally, as reported by CoinMarketCap. This proliferation of trading venues has several challenges, such as connectivity issues, where buyers and sellers often transact on different platforms, hindering efficient matching.
Competition in crypto markets happens on several levels, much like TradFi markets, but with some unique features. Just as in traditional markets, crypto trading includes:
- OTC (over-the-counter) versus onexchange trading
- The differences between quotedriven and order-driven markets.
However, the crypto market also brings in new aspects, such as:
- Onchain versus offchain trading execution.
- The choice between centralized trading venues and decentralized exchanges (DEXs).
These factors add complexity and show how the crypto trading environment is constantly changing.
Regulatory Frameworks
The regulatory landscape plays a crucial role in shaping market fragmentation and stimulating further division, as different jurisdictions are at various stages of implementing crypto regulations.
These regulations could influence where trading flows concentrate in the future. Regulatory developments may lead to a shift in trading volumes between offshore and onshore regulated markets, potentially altering the current landscape.
Read the full report here by Cointelegraph
