Analysis: Are Retail Brokers Jumping Off the Cryptocurrency Wagon?

Brokers hoping to cash in on the popularity of cryptocurrency faced a shock - what will they do now?

Almost as soon as brokers entered the cryptocurrency market they began escaping from it, as they quickly became aware of adverse conditions that were generating only excessive costs rather than the forecasted profits. The one-sided, continuously-growing crypto market caused the house to lose its edge as retail investors were handed a powerful tool in the form of ‘hodl’.

In the latest issue of the Quarterly Industry Report (QIR), Finance Magnates takes a closer look at the crypto offerings of retail brokerages, asking the biggest companies about their experiences and opinions regarding the volatile and quickly developing market.

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Here we present a brief summary of the extensive article in the newest QIR4 2017.

Bad entry and exit moments?

Some brokers decided to completely withdraw cryptocurrency contracts from their offerings, while others suspended it waiting for better times to come. The biggest wave of brokers abandoning crypto CFDs appeared in the middle of December 2017, just two weeks before the market’s dynamic retreat. Many investment companies that were waiting for the introduction of Bitcoin futures realized that hedging their exposure via the CBOE and CME Group was not a feasible option or them.

Ultimately, the initial excitement brought only higher prices for crypto assets, leaving retail brokerages without an effective hedging tool.

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Jens Chrzanowski, Member of the Management Board of Admiral Markets Group AS, honestly admits: “The majority of reputable brokers had a break in late 2017 with their cryptocurrency offer, and so did we. Why? The basic principle of trading – supply and demand – didn’t apply anymore, bid and ask have to find a balance. If the demand is only on one side of the market, no exchange or liquidity provider will be able to execute orders properly. If the market in general will not find the usual balance between supply and demand, such breaks may occur again, for any broker.”

A large number of retail CFD brokers focused on the desire to generate the largest possible profits in the shortest possible period of time, forgetting about long-term strategies and goals. It should be clearly said that cryptocurrency derivatives are often much more desirable for traders than trading through a crypto exchange. High leverage, tight spreads and unattractive SWAP requirements are not needed to encourage investors.

Volatility and liquidity among biggest obstacles

According to the short survey conducted by the Finance Magnates Intelligence Department , retail FX/CFD brokers see the biggest obstacles of the crypto market in the market’s high volatility and lack of liquidity. This however does not change the fact that 50% of the brokers offering Bitcoin trading are considering adding another crypto asset to their instrument ranges – the biggest coins (in terms of capitalization) are the most frequently mentioned  – Bitcoin Cash, Ethereum, Ripple, and Litecoin are among the most popular.

Presenting derivatives as a safer alternative to cryptocurrency exchanges, brokers can count on the long-term interest of traders without re-building their marketing strategies for the wave of new investors wanting to get rich quick on the cryptocurrency bull market. Now that the cryptocurrency fever has dropped, at least for a moment, it is a good time to re-balance offerings and present solutions that are applicable for both traders and businesses.

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