As the crypto market matures and large cryptocurrency exchanges amass deep liquidity, brokerage firms–prime brokerages included–are ready to enter the market, setting the stage for the next phase of industry growth.
When it comes to traditional financial markets, brokerages have long offered essential services to customers. Whether it’s full-service investment brokers providing investment advice and hands-on planning, or discount brokers solely occupied with fulfilling buy and sell orders, brokerages allow investors and traders both large and small to access the stock market.
Today, most retail investors and traders place trades through online stock brokers like IG, Saxo Markets or Hargreaves Lansdown, while institutional investors flock to prime brokers like Goldman Sachs or JPMorgan Chase. In total, brokerage firms hold trillions upon trillions of assets along with millions of active accounts. As a result, brokerage firms play a leading role in the traditional financial world by serving as the main interface that connects buyers and sellers. However, while the brokerage firm maintains a commanding presence in today’s traditional markets, they’ve made relatively shallow inroads into the cryptocurrency market.
The Rise of the Crypto Exchange
The rapidly growing crypto market has been dominated in large part by cryptocurrency exchanges, where buyers and sellers converge to buy and sell cryptocurrencies directly with each other. Most crypto investors and traders purchase crypto from cryptocurrency exchanges, whereas relatively few traditional brokerage firms offer their customers a way to buy crypto.
Currently, there are hundreds of digital asset exchanges competing within the crypto market, in numbers that echo that of brokerage firms in traditional markets. However, it’s fair to assume that the self-adjusting system of the trading world will narrow its selections over time. Cryptocurrency exchanges that are able to attract large numbers of buyers and sellers will also increase their liquidity pool, which encourages yet more buyers and sellers to join their platform. Deeper liquidity, in turn, means more orders can be quickly matched at the best available prices. These strong network effects ensure greater centralization in the crypto market.
Today, the fragmented liquidity across digital asset exchanges poses challenges for market participants who want to limit market impact when executing large orders. The rise in the number of ‘flash crash’ events can be attributed to this fragmentation, in part because of the absence of robust brokerage offerings—and traders being unable to trade the mispricing. Leveraged spot trading and federated transfer of bitcoin across exchanges, features that are now available today, could have alleviated some of this pressure. Prime brokerage services aim to solve for capital inefficiencies and improve the lack of synergy between different platforms.
As the market continues to trend towards consolidation, the increase in concentrated demand and liquidity have greatly improved the attractiveness of crypto investments. For example, since 2018, the crypto derivatives market ballooned, signaling increased appetite from institutional traders, as well as the maturation of popular cryptocurrencies like Bitcoin—all of which mirrors the traditional financial world, where derivatives trading has seen enduring popularity as a flagship financial product.
The Broker’s Role in Driving Crypto Adoption
The rapid expansion of crypto derivatives has attracted interest from institutional investors, while increasing crypto adoption has led to greater convergence between traditional and crypto financial market players. Digital assets like Bitcoin are gaining institutional acceptance from some of the traditional finance industry’s largest players. It’s clear that over the past few years, crypto markets are increasingly coming to resemble traditional markets.
Enter the prime brokerage: Prime brokerages, which have been around traditional markets since the 1980s, have long offered a “one-stop shop” for investors. Only now are they beginning to mature within the digital asset market. As crypto infrastructure rapidly begins to fall into place, and large cryptocurrency exchanges are finally able to offer enough trading depth and liquidity to attract traditional traders, brokerage firms–prime brokerages included–are preparing to enter the market, setting the stage for the next phase of industry growth.
Crypto brokers are able to provide access to multiple exchanges, ensuring maximum liquidity for their customers. Even more importantly, they’re in a better position to provide the distinct “one-stop-shop” features that institutional investors are looking for, from advanced trading tools to granular data analytics that maximize trading performance. My company, Binance, a global blockchain company that includes one of the top digital asset exchanges, is already anticipating this shift within the crypto market.
Building an Open Platform for Brokers
With the momentum increasing, brokers entering the crypto space are in a race to offer competitive trading services in order to attract mainstream retail and institutional investors, and further bridge the crypto and traditional financial markets.
By offering sophisticated trading services for mainstream investors, crypto brokers will be positioned to lead the professional development of the crypto market, while leveraging the security and expertise of established cryptocurrency exchanges, as well as their overall market depth and liquidity. In turn, the influx of capital brought in by crypto brokers will further contribute to the exchanges’ liquidity.
Over the past year, Binance’s digital asset exchange has launched its own broker program. To put the size and scope of the demand in context, we’ve identified and onboarded more than 200 crypto brokers who offer competitive crypto trading services.
Brokerage services are well positioned to help our industry bridge some of the gaps between the crypto and traditional financial markets and drive continued digital asset growth. Since launching our broker programme, our partners have cumulatively accounted for a growing portion of the overall trading volume on our exchange, recently notching a 300% quarterly increase. Even at this early stage, there’s a clear and growing demand for brokerage services.
As more crypto brokers enter the market, the symbiotic partnership between brokers and exchanges will generate its own network effects, enable greater institutional money inflows, and further advance the crypto market by providing what could be the essential thrust for the next phase of crypto adoption.
CZ (Changpeng Zhao), Founder & CEO, Binance
CZ is a serial entrepreneur with an impressive track record of successful startups. He launched Binance in July 2017 and within 180 days, grew Binance into the largest cryptocurrency exchange in the world. An expert in blockchain and trading systems, CZ has built Binance into the leading blockchain ecosystem, comprised of Binance Exchange, Labs, Launchpad, Info, Academy, Research, Trust Wallet and Charity Foundation.