Global trading volumes in crypto assets are set to overtake those in the US corporate debt market, despite this year’s market setbacks, claims a report.
It is one of the findings in the fifth in a series of reports by research and intelligence house Satis Group, initiating coverage of the crypto asset class.
Extrapolating from historical trading data, Satis estimates 2018 trading volume for crypto will be at $7,300 billion ($7.3 trillion), $243 billion more than US corporate debt’s $7,056 billion ($7.05 trillion).
That is impressive given that we are still in the depths of the bear market, the bottom of which we may be finally witnessing.
By way of further comparison, US Treasuries ($121 trillion) and US equities ($74 trillion) volumes tower over both US corporate debt and crypto trading (see bar chart below).
Nevertheless, the findings attest to the dramatic growth of the ecosystem developing around crypto in these still early days for the asset class.
Just the other day I remarked in commentary for the UK tabloid newspaper The Sun that crypto was a “rounding error” when compared to the size of world equity and bond markets, not to mention other asset classes such as commodities and the tens of trillions of dollars of stacked up on top of all of that.
However, although the market capitalisation of crypto is only $226 billion or so, according to CoinMarketCap, the activity that it sets in motion – of both highly speculative traders and those allocating capital for the long term – shows a higher rate of activity, or velocity, given the asset’s size.
After all, outstanding corporate debt in the US is valued at $6.3 trillion versus crypto market cap that is just 3.5% of that size.
The findings are even more remarkable given the collapse in crypto trading volumes seen in this year’s crash, with volumes only just starting to recover.
As well as eclipsing US company debt this year, the Satis report reckons crypto trading volumes will soar to $17.8 trillion by 2028.
High-yield corporate bonds riskier than crypto?
Interestingly, as interest rates rise in the US and the days of cheap (some might say “free”) money fade, the game could be changing in the debt markets.
In particular high-yield corporate bonds are vulnerable to a correction, which could have unforeseen consequences for other parts of the financial system if company failures were to spread, creating possible systemic risk.
High-yield bondholders lend at this riskier end of the corporate spectrum and therefore command a higher rate of interest (yield) for temporarily parting with their money.
However, with corporate America still able to service its debts in a red-hot economy, that for now might push back the chances of Black Swan events.
Opaque bonds, transparent crypto
There are obviously significant differences in the way corporate debt and crypto are traded, with companies issuing their paper for auction in large tranches which are then traded in secondary markets.
Bond trading is traditionally seen as the senior market to equities.
The world of sovereign and corporate debt is far removed from the retail investor; some might say an opaque world of vested interests that the revolution in online trading of equites largely left untouched in its essentials.
By contrast, crypto is the opposite in terms of accessibility and information.
The problems at crypto trading venues are of a different order, and mainly concern exchange security and possible market manipulation.
Technicalities aside, if the relatively small US corporate debt market gives the financial authorities headaches, it is easy to see why they might have nagging worries about how the system will cope with the next crypto bull market, despite G20 finance ministers pronouncing that crypto is too small to worry about.
But as we now know, things change quickly in the 21st century.
Crypto exchange fee revenue $2.1 billion in 2017
Which brings us to the other standout finding for me in the Satis report – how much money there is to be made running an exchange, as judged by the fees at any rate.
Crypto exchanges globally amassed $2.1 billion in trading fees in 2017.
Satis sees that growing to $3 billion this year as support from mainstream exchanges – Brazil’s GrupoXP announced this week it is setting up a crypto exchange, institutions and helped by “retail adoption through developing inlets such as mobile app”.
Now compare that to the money being earned by US brokers from their retail clients, of which the fees component comes in at $2.6 billion in 2017.
Exchange fees in global equities trading is only $100 million ahead of crypto at $2.2 billion, with crypto exchanges earning $2.1 billion in fees.
Given the size of the prize on offer, expect more deals like Circle’s acquisition of Poloniex as confidence returns to the market.
Again, crypto is punching way above its weight.
In addition to overtaking US corporate debt, Satis expects crypto trading volumes to grow by 50% through to 2019.
The report also found that the top 20 exchanges have grabbed 75% of global crypto trading volume and that BTC is the base pair for a third of global crypto trading (USDT is 22%, ETH 12%).
Satis Group analyst Sherwin Dowlat was the lead researcher on the report.