Cryptos have democratised financial investing in ways traditional equity and bond markets never did. You can open an account with a crypto exchange and buy R10 worth of bitcoin. Try that for size with an equities broker.
On a crypto exchange you can trade day and night, and through weekends, all at very low cost.
You can do the same in forex markets, but equities markets trade only during certain daylight hours, with pre-and post-market trading open only to certain types of investors.
A new report by crypto exchange Kraken Intelligence entitled ‘Traditional Markets vs Crypto Markets’ shows how cryptos have leapfrogged traditional markets in several crucial ways.
“At a $1.3 trillion market capitalisation and counting, the evolving crypto asset market enables anyone with an internet connection to participate side-by-side with multibillion-dollar institutions on the same platforms and using the same open source, publicly-available information found on a public blockchain, Github, Twitter, and other public platforms. The crypto market is transparent and open to all, and has not had the types of recent mishaps in the traditional financial markets.”
Legacy markets give competitive advantages to those with deep pockets, but this is about to change as technological advances in the crypto sphere will spill over into traditional markets.
Crypto vs traditional markets
A key inefficiency in traditional financial markets is the number of intermediaries required to process an order. Most market participants are not entitled to trade directly on exchanges, leaving the investor at the mercy of intermediaries (such as the exchanges themselves), who can order trading halts or other potentially market-influencing events.
Trading halts are typically ordered to stop excessive volatility in equities. No such mechanism exists in cryptos, barring purely technical glitches. That means there is nothing to stop the often wild volatility experienced in crypto prices.
A crucial advantage of cryptos over traditional markets is the absence of intermediaries. Trading in equities requires a broker or financial advisor, who is obliged to act in your best interests for a fee. However, there is abundant evidence of intermediaries churning (over-trading) accounts to generate fees or, more normally, slapping on an annual management fee as a percentage of assets under management – regardless of performance.
For those who don’t use an investment advisory service, like a financial advisor, investment decisions can be directed to a broker-dealer such as Robinhood, E*Trade, TD Ameritrade and others. In such instances, the broker-dealer may route your order to a trading venue for execution or sell you stock directly from their own inventory.
Brokers make money through trading fees, while dealers profit from a bid-ask spread, which is the difference between the price the client buys or sells a security at and the price at which the dealer bought or plans to sell the asset.
High frequency traders (HFTs) are able to exploit inefficiencies in legacy markets, and invest vast sums in equipment and cables to get a few micro-seconds jump on the rest of the market in the placement and execution of orders.
The crypto market is cloud-based and fragmented into several exchanges, limiting speed advantages based on geography.
Regulatory or management interference in traditional markets is a worrying trend, such as happened at Robinhood, Ameritrade and Charles Schwab, which suddenly suspended trading in ‘meme’ stocks like GameStop. There are no centralised authorities to halt trading in crypto assets.
The events of the GameStop ‘short squeeze’, where hedge funds were forced to liquidate short positions after an army of Reddit traders bet against them, expose another flaw in traditional markets. At one point, the shorts on GameStop were 140% of the total available number of shares in issue, highlighting a critical rupture in the existing market system.
In crypto markets, most participants can sign up with an exchange of their choice where they themselves can submit buy and sell orders to the same orderbook that billion-dollar financial institutions use. Unlike traditional markets, there is no need to rely on an intermediary to execute your order and settlement is done through the same venue with which you placed the order. This is done via a centralised exchange (which operates like an independent stock exchange), decentralised exchange (an exchange allows peer-to-peer buying selling of assets without an intermediary, using blockchain technology to keep track of orderbooks and facilitate trades), or an over-the-counter desk.
Decentralised exchanges are not as reliable as centralised exchanges as there is no central entity ensuring trades are executed, there is no customer support, and service is slow and often expensive.
“With crypto, market participants directly participate in order generation and execution by signing up at an exchange, going through the verification process, funding their account, and sending a trade to the exchange’s order book all on their own. Market participants have full visibility into execution prices and the exchange’s orderbook, which allows them to seek best execution without relying on intermediary – though some market participants ought to be wary of the exchange’s trading fees and potential for slippage,” says Kraken Intelligence.
Settlement of trade in traditional markets – which involves transferring assets between buyers and sellers – can take two days or more, depending on the market.
Comparatively, settlement of crypto transactions can take several hours, but is sometimes completed in minutes. Trades are settled by an exchange on its books or once it has sufficient confirmation on the relevant blockchain.
Traditional markets can no longer resist the technological leaps brought about cryptos, cryptography and blockchain. They will be forced to adapt to this revolution.
“We believe the future of traditional finances [is] eventually headed towards democratised investment systems that aggregate the resources of millions of people to drive innovation and economic prosperity,” says Kraken Intelligence. “This democratisation will change how we see securities trading, how we view investing and how the average person can benefit from it economically.
“Anyone can invest in what they believe will bring about progress or have value, share their findings, and reflect such convictions real-time in the marketplace. There will be no pre-market trading or post-close trading sessions that are open to certain types of investors, or additional fees to utilised services.
“Markets will come to mirror that of cryptocurrency markets that are accessible without a broker, and run 24/7, 365 days a year.
“Furthermore, with low-to-no fees, the concept of investments will be made approachable for the average person with a small amount of capital.”