Turnkey cryptocurrency liquidity solutions for Retail FX Brokers

With Bitcoin, Ethereum and other crypto coins so prevalent in major news publications, more retail FX brokers are inquiring, discussing and shifting their attention to this exciting new asset class. Alexander Nekritin, Managing Director of Nekstream Global, analyzes this phenomenon that is sure to change the landscape of the online trading world.

First Published: e-Forex Magazine 77 / FX Brokerage Operations / September, 2017

Simply stated, cryptocurrencies represent an entirely new web-based invention.  They are digital currencies based on encryption software.  Bitcoin, Ethereum, Dash and all other cryptos are decentralized – meaning they are not backed by any government.The cryptocurrency market has the potential to expand exponentially due to the widespread use of blockchain technology.  Blockchain removes intermediaries like banks, brokers and institutions from financial transactions.  It allows users to interact with each other directly through the use of cryptography or secure coding.  So blockchain technology makes transactions faster and easier to send to one another.

Cryptocurrency trading (buying and selling of the coins) has already experienced a massive growth in 2017 with a record breaking market cap of over $120 billion.  

There are over 900 cryptocurrencies circulating the web space and Bitcoin (introduced in 2009) has been in the forefront of this movement.  There is a natural fit for FX brokers to offer cryptos.   

High Volatility / Leverage Ease of Market Access
Commission structure Familiar Offering / Sales
Fear of Missing Out Seamless Integration

High Volatility / Leverage Trading

Huge price swings in the crypto market are quite common.  Coins that are considered ‘majors’ can move drastically with major news events.  For instance, the price of Bitcoin 
has risen nearly 8x in the last year.  And then on September 4th of this year, a change in viewpoint by the Chinese government spurned a 19% drop in price overnight.  Then you have Ethereum, which has risen over 3000% in the last year while LiteCoin has increased 2000% in that same time period. 
 
Volatility in the marketplace is a positive for brokers.  Experienced FX traders are much more attracted to volatile markets over range bound ones.  When a price of a currency pair sky rockets or plummets it creates an excitement that traders crave.  With cryptos you can take that excitement and add leverage and you get a very relatable product.

Retail FX traders are certainly comfortable with a leveraged instrument.  With cryptos, leverage can go as high as 20:1 (derived from a broker LP).  Typical leverage will max out at 3:1 from a broker LP. Traders will not get the high leverage they are accustomed to when trading FX.  But at 3:1 leverage (and the volatility) it is more than enough to keep them motivated.

Commission Structure

As a baseline, typical commission charges for crypto trading will range from 20-50 bps (0.20% - 0.50%) per side. 

 The value of the underlying crypto will affect the price you pay in commissions.  For example, when the price rises in BTCUSD, you will pay a higher commission for that trade.  And conversely, you will pay less if the price of the crypto drops.

For brokers, the commission earned per trade is very much in line with the markup or commission per trade on a spot FX transaction. To explain, let’s say a trader buys or sells 1 lot of BTCUSD at a price of 4110.00 with a 25 bps commission:
1 BTC * 4110.00 * 0.25% = $10.28 USD

Brokers will have the opportunity to mark up these commissions on top of what they are charged by the LP’s.  Another opportunity to earn would be through a spread mark up.  Spreads are commonly marked up as well to add to the overall payout for brokers.

Fear of missing out

The popularity of cryptos will only increase amongst the general population - not just traders.  
Brokers must always stay active and current in their offering to their traders.  Retail FX traders can easily move from broker to broker with a simple click of their mouse.  And these ‘bread and butter’ retail fx traders will find those brokers that have Bitcoin, Dash, Ripple and others before they remain loyal to a broker that does not have them.  

Ease of Market Access

Crypto CFDs enable traders to take advantage of price movements without the need to own or purchase the cryptocurrency itself. This way traders do not need to address security matters, set up and encrypting an e-wallet and downloading a backup.   With crypto CFDs retail FX traders can wrap their brains around it seamlessly.  

1 lot 1 unit of Base currency 1 BTC

Familiar sales/offering

Sales teams at brokerage shops have all of the necessary tools to talk about crypto trading to any experienced trader or client.  A salesperson can simply discuss close similarities between trading spot FX and cryptocurrencies.  They can discuss leverage and then the ability to go long and short on any crypto CFD.  CFDs on cryptos allow this.  And they can focus on the fact that their trading account can be USD, EUR, JPY or GBP based.  This would certainly help get clients comfortable with the general concept of trading a Bitcoin or Ethereum versus the US dollar or Euro.

Seamless integration

FX brokers have two main options to get setup quickly with crypto liquidity – brokers can integrate with crypto exchanges or broker liquidity providers.  Connection and integration directly to crypto exchanges is not always straightforward. Their APIs are not always designed for FX brokers which can make integration challenging and time consuming. Customer support from the crypto exchanges is rarely adequate.  Most websites for the cryptocurrency exchanges do not have customer support line and only will have a generic email system. If you do happen to get someone on a call, they lack the knowledge of a retail FX broker.
On the other side, brokers can connect to crypto broker LPs over FIX API.  They are already pre-integrated into popular bridge providers such as OneZero, PrimeXM.

This essentially makes working with crypto broker LP’s a plug and play solution for brokers.  And of course crypto broker LP’s can provide strong customer support to their broker clients.  Having the background and experience in FX allows them to anticipate the questions and concerns from their clients.  At Nekstream, we find the process of setting up a broker to a broker LP as simple as it comes.

The steps necessary to be set up with crypto broker LP is very straight forward:
Simply do the necessary paperwork with your LP which is very similar to setting up corporate accounts.  Next you would send margin via wire to the bank or institution used by the broker lp.  And just add the crypto LP in your OneZero or PrimeXM platform.  This step could take 1-2 weeks depending on your own tech or development team.  

Then you will have the instrument(s) streaming into the trading platforms you offer such as Metatrader. 
Many crypto broker LP’s are FCA and ASIC registered.  And they are allowing broker clients to face their regulated entity.  This helps alleviate concerns over counterparty risk.  

3 Step Breakdown:

Step 1: Corporate paperwork +
Step 2: Deposit Margin +
Step 3: Add crypto LP to your bridge =
Streaming crypto pricing

Most popular cryptocurrencies

One of the best things about cryptos are that new coins can gain interest in popularity very quickly.  The very nature of how a coin is created creates excitement amongst early investors.  Crypto coins are formed as a means to fund a new business or project.  If the business or idea is well received, then the coins value can gain traction.

So the amount of instruments and coins that will be offered for clients to trade on will grow exponentially. Cryptos are paired with currencies such as USD, EUR and GBP to create a tradable CFD pair.  Here is a list of the cryptos that brokers will focus on in order of importance and popularity:

   
1) Bitcoin (BTC) 2) Ethereum (ETH)
3) Ripple (XRP) 4) Dash (DSH)
5) LiteCoin (LTC) 6) Monero (XMR)
7) ZCash (ZEC)  

BITCOIN  
Trade symbol = BTC
Created and introduced in 2009, Bitcoin’s market capitalization has grown considerably to approximately $32.7 billion.  This accounts for more than 30% of total cryptocurrency market cap.  The most traded pairs include BTC (Bitcoin) paired with USD, EUR and JPY.  

ETHEREUM
Trade symbol = ETH

Ether, or the cryptocurrency for Ethereum is a decentralized platform capable of executing peer-to-peer ”smart contracts”.  Ethereum is ranked second in terms of market value ($15.3 billion) and is also regarded as the first alternative to Bitcoin.  Ethereum is commonly paired with Bitcoin (ETHBTC) as well as USD, GBP and EUR.

RIPPLE
Trade Symbol = XRP

Ripple real-time gross settlement system was established in 2012 and integrated into several financial institutions and payment networks. The cryptocurrency used is known as ripples and currently has a market cap of $5.5 billion

LITECOIN
Trade symbol = LTC

Litecoin, which was introduced in October 2011 by Charles Lee who is a former executive at Google.  Litecoin’s market value is at $2.1 billion.Dash, ZCash and Monero are very popular amongst traders and liquidity providers.  It is also worth mentioning the growing interest in Nem (peer to peer crypto) and Lisk.  

The cypto pairs mentioned here have a significant user base and can be considered a bit ‘ahead of the curve’.  But new coins are created every day.  Newly issued cryptocurrencies are created through an ICO.  An ICO is an Initial Coin offering that are used by start up businesses where a percentage of the new coin is sold.  More businesses are turning to ICO’s as an alternative to raising capital for their venture. The rate of new coins being created, issued and offered is only growing.  Nekstream, as a group, anticipate that many thousands of unique coins, tokens and assets will be created over the next decade from all regions of the world.

Ethereum is regarded as the first alternative to Bitcoin
Ethereum is regarded as the first alternative to Bitcoin

How can brokers get Liquidity easily

As stated, a broker can work with an exchange or broker LP to get cryptos.  Here are the technological and logistical aspects of getting liquidity.  A broker can connect directly to a crypto exchanges and send client trades there:

Trader > Broker > Exchange

Or brokers can go to cryptocurrency broker LP’s that act as either a market maker themselves or use an STP model to lay off trades to the exchanges

Trader > Broker > LP > Exchange(s)

Concerns for FX Brokers in offering crypto trading vary from place  to place.  When choosing their connection and technology there are several key parameters to focus on. 

Here we have summarized the key differences in working direct to the exchanges versus crypto broker lp’s:

Parameter Direct to Exchange Broker liquidity provider
Max Leverage offered 3:1 20:1
Commission to broker 15-30 bps 20-50 bps
Market Depth Can be limited Potentially more market depth
Integration More challenging More in line with FX and in some cases LP’s will be pre integrated to major connectivity providers such as OneZero and PrimeXM
Customer Service Limited More experienced and readily available
Funding Currency BTC only USD, EUR, GBP, JPY
Safety of Funds Unprotected Broker protected

It is Nekstream’s opinion that working with a crypto broker LP is the most efficient way for brokers to get crypto liquidity. 

To summarize, brokers working with crypto broker lp’s could get higher leverage, receive potentially more market depth, have easier integration, experience better customer support and can use funding in fiat currency to start their operations.

New products

We anticipate a new wave of products and services based around cryptocurrency trading.  There are several companies already creating educational material for fundamental and technical traders. Also, social trading companies are already ramping up their crypto offering.  More traders are developing systems and algos based on crypto markets, and want to promote and discuss their strategies.  It is simply a natural fit for social trading companies to expand their offering to cryptocurrencies.

Concerns about the growing market

Certainly we have focused on all the positives that cryptocurrency trading will bring to the FX broker world.  But we have to side with a air of caution as well.  There could be too much demand too quickly. For crypto broker LP’s the concern would be liquidity supply.  In talking to broker LP’s, they are starting the process of connecting to more and more crypto exchanges.  In a way, this is critical to their growth and expansion. The demand will only grow from all sides - traders and brokers alike.  It is imperative for broker LP’s to establish more lines of liquidity themselves to keep up with the demand.  It is somewhat time consuming and a lengthy process, but it is high on their priority list.  Some LP’s are connecting to alternative sources such as hedge funds.  This alternative liquidity option has increased in popularity due to the fact that unique liquidity is always a great selling point to brokers.

All in all, out of several thousand active Forex brokers, about a dozen of them have so far added cryptocurrencies to their product offering.  Over the next few months, we predict that cryptocurrency trading will be offered in hundreds more brokers from all across the globe.  And Nekstream can help service brokers in most regions of the world.

What the future holds 

The cryptocurrency market has the potential to expand considerably in the very near future.  With the increased value placed on blockchain technology, it is becoming easier for an individual to use these digital assets. When talking about the future of retail FX – 2018 is shaping up to be the year of the cryptos.
 
We at Nekstream encourage brokers to get into this space as early as possible - Don’t miss the boat!

For any liquidity related questions, feel free to contact the staff at Nekstream by emailing them at info@nekstream.com Or visit their site at http://nekstream.com/crypto/