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November 25, 2020

Market Spotlight

How liquidity in the crypto markets stacks up with SFOX and Blockfills


Liquidity in the Crypto Markets

One way to gauge the maturity of the cryptocurrency markets is to compare its growth to that of the traditional financial markets. Daniel Kim, head of revenue at SFOX, and Neil Van Huis, director of sales at BlockFills, are both alum of the traditional financial markets and have witnessed first hand the growth of liquidity in the crypto markets. SFOX’s Kim noted,

(5:01): “From three to five years ago to now, liquidity has grown tremendously. What we’ve seen is heck, if you tried to buy 100 bitcoins two-to-three years ago, you’d move the market instantly.”

(5:20) “But today people say if you try to move bitcoin or ether, it’s fully liquid; it’s a lot more comfortable.”

Crypto Leverage

The derivatives space has seen an explosion of growth in unregulated cryptocurrency derivatives markets and the emergence of products like perpetual swaps, giving traders an opportunity to take on significant leverage. The regulated and unregulated worlds tend to operate in silos.

(12:42) Van Huis explained how it’s an interesting landscape. At Blockfills, they only work with institutional investors, not retail folks, as a result of which their view into the market is one-sided. He explained:

(12:53) “When we talk to pro traders, hedge funds, institutional traders, etc. they really tell us, ‘We’re not really looking for another perp out there in the world. We’re not interested in 100x leverage to take a position. We’re just market making.’ And so I think if you look at those highly levered positions, the demand is at the retail level or the low-level professional that is looking to try to outperform.”

Early Days for DeFi

Decentralized finance, or DeFi, is an area that has taken the cryptocurrency industry by storm, as market participants look to reconstruct traditional assets into a decentralized version. According to SFOX’s Kim, however, there will be growing pains along the way.

15:26: “DeFi right now is becoming very, very popular. It’s a thing that everyone believes in and wants to get into. That liquidity, it’s there. But it’s still very early, right? Like everything that starts off as a new product, the idea is always great but there are always still certain flaws that need to be checked out. And unfortunately there will be accidents that do happen,” said Kim.

Van Huis harkened back to the traditional capital markets, where the saying “liquidity begets liquidity” originated, saying that it is the dynamic in the cryptocurrency markets too.

(16:26) He argues that while DeFi is an “incredible concept to build for the future,”accidents will happen, just as they did in crypto’s early days. Van Huis expects that there will be security measures implemented as a result of oversubscription and mass adoption, saying:

(17:07) “I think that’s the thing that I dislike most about DeFi right now, is platforms that try to grow too fast too early and don’t have the right security in place…It’s one thing to get hurt on a trade. It’s another thing to get hurt from not having the right technology and security in place….While DeFi is very immature, we hope that it expands. It has a way to go in our opinion.”

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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