FX vs. Crypto exchange Markets

From Blockchain to Cryptocurrency Exchanges
In the last few years we have seen a revolution in the Crypto World. Crypto Currencies and Crypto assets have become the day to day subject of conversations and have attracted a lot of media interest.

I believe Blockchain is about marketplaces. If there is no marketplace, then there is no need for a blockchain. This belief is underpinned by the fact that the most profitable companies in the Crypto space are Crypto exchanges. Taking this into account it makes sense to me, as a blockchain believer, to be concerned about how Crypto exchanges work.

“Blockchain is about value, value is what makes something desirable, desire (or lack of it) leads to buying or selling in a market place. Blockchains would not work without Crypto Exchanges, they are the market places for their underlying unit of value transmission, cryptocurrencies”

This article is about Cryptocurrency eXchange markets (CX), versus traditional Foreign-currency eXchange (FX) markets, how they work and how they differ.

Let us start.

Market Size

FX markets nowadays are a large ecosystem of many different actors. It is probably the largest financial market by trading volume, measured by both cash contracts or derivatives. Annual trading volumes are estimated to be over 5 trillion (this is a 5 with 12 zeros) for cash contracts. If you include derivatives this would be probably at least double (being very very prudent *) . This is a number provided yearly by the International Bank of Settlements, BIS in Basel. The BIS keeps statistics of all trades done between countries (can you already smell an interesting difference with Crypto markets here? ) and serves as a world’s market of FX markets.

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Source: https://brokernotes.co/forex-trading-industry-statistics/

Cryptocurrency exchange markets are by comparison very small. We can see this looking at the current market cap of all cryptocurrency as shown on http://coinmarketcap.com; the spreadsheet with the total market cap of the +1000 tokens and currencies listed there is available here.

This spreadsheet also shows the 24h volume, which we will take as representative of the average volume for the year: 24,4bn USD (I am sure this last number is outright wrong). The statistics from the BIS measure the size of the trades by looking only at one of the legs in a FX trade. The coinmarket cap shows daily volume by currency. This means we should divide by 2 if we want to compare the number provided by coinmarketcap.com with the 5,2tr volume of the global Forex market reported by the BIS. We will make a small additional adjustment as traditional forex markets are closed on weekends (as stupid as it sounds) so it is fair to adjust their ‘daily’ stats so we can compare them with a real 7 days a week “daily” stats :

( 24,7/ 2 ) / ( 5200 * 7 / 5 ) = 0.17 %

So it seems that the cryptocurrency market is quite small (0,17%) compared to the size of the FX Global market (retail and wholesale, more on this later). How does it compare with other traditional markets, such as Oil, Gold or the New York stock exchange?

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In traditional FX markets you have retail customers and small corporates, who trade with brokers and international banks. The size of the retail market is only 5,5% of the total volume. So in fact, because in the Cryptocurrency world there are no institutional traders we should probably review the comparison we did in the previous section and compare the size of the retail market for both cryptocurrency and fiat.

Daily volume of retail traditional FX markets: 5,5 % * 5200bn =286bn

Crypto market is 12.2bn daily or 4.3% of the traditional Retail FX market … so it is not that small after all.


We said that traditional FX markets have retail customers and small corporates who trade with brokers and international banks. The size of the retail market is small, only 5,5% of the total volume, the rest, 94,5%, are institutional players.

In the current CX world things happen a little bit differently. There are no institutional traders and all volume is initiated by retail traders. There is another interesting fact, which is that most crypto exchanges don’t have their own trading positions, acting as pure brokers that buy with one hand and sell those positions with the other hand to some of the bigger exchanges that act as market makers: Poloniex, BitMex, Coinbase, Kraken, Bitstamp . This shortlist is my own assumption. It is difficult to name those market makers, as for some of the cryptos there are specialised exchanges which are the only ones having enough liquidity to act as market makers for those cryptos.

Besides those big exchanges there are another thousand, which are local brokers and small payment processing companies that rely on the big ones for liquidity.

Outside this circuit there is the pure peer to peer, person to person trading, which escapes all control and statistics. My assumption is that this is at least as big as all the others combined.

In traditional FX business there are tens of thousands of brokers, from the street exchange bureau to the local credit card payment provider down to the the small bank which typically deals with some of the biggest brokers. Those bigger brokers will then have access to banks who clear their positions through their accounts with the national banks. National banks will swap their positions with each other using the account at the BIS in Basel. Can you feel it? It is definitely far more complicated than crypto exchange market.

You can get an idea of how many people are being fed by this business when you realise that you can pay up to 5% commission when you buy or sell currency in a street FX exchange shop, where normally only 0.1% or less would be paid in the interbank market. This is a highly lucrative business, which has only been hit recently by lower returns due to the reduction in carry trade positions following the cut in interest rates.

Market Practices

The traditional FX market is very transparent. All participants quote Buy/Sell prices together for a given currency pair. For example the price of USD/JPY will be quoted as 112.178–112.181 , meaning that you can sell 1 USD against 112.178 JPY or buy 1 USD paying 112.181. Prices are bid/ask and contain no commission.

The cryptocurrency market is quite different in this regard and more similar to the equity market where prices are built by matching orders in a book, with the price being that of the last trade made. This highlights the brokerage spirit behind the CX market, where no market making seems to exist. Profits are made through commissions, like in the securities market or in FX CFD market.

Another important difference is that in the CX market you hold positions with your broker, this is, you keep the cryptocurrencies that you trade on their platform and settlement is made by them quasi real time. Crypto Exchanges may as well charge you a maintenance fee for the balances you keep with them.

Risk Management

In the traditional FX market there is a clear distinction between brokers and market makers. Brokers will keep a very small amount of own positions, clearing them almost immediately in the interbank market to avoid any risk from price fluctuations. Market Makers quote prices at which they are ready to take positions, moving the price that brokers will quote to their clients.

The Crypto Currency exchange market is somehow different in this regard. There seem to be no own trading positions, but small ones. Big exchanges act as liquidity providers, but they do not do arbitraging and take few own trading positions.

This is both inefficient and a waste of time. Traditionally participants in the FX market try to consolidate positions so they minimize the settlement costs. This means they would take risk in their own books expecting to close the position at a more favorable price than the one at which they have bought it. This is often done as well by adding up net positions by currency, and not currency pairs, so that netting opportunities reduce the amount of trades done and open possibilities for profit coming out of market inefficiencies. This will reduce as well volatility in the market as any small price mismatch will immediately be traded and absorbed by market makers.


Instruments: there is a lot of margin to grow here. Crypto FX markets need to develop and offer products that can be used for day to day risk management and liquidity management

Volume: Crypto FX markets will never be able to reach the size of global classical FX markets. This is fundamentally due to the fact that it is a very flat market compared to the global traditional FX market, where banks and brokers need to consolidate and pass up to country central banks their positions mismatch, often through correspondent banking practices that distort and inflate the volumes in relation to the underlying economic needs that are the reason for them to exist.

Practices: Crypto FX markets use its own practices that mimic most of what is found in traditional equity markets. With the upcoming raise of derivatives trading this may or may not change. I think it is very likely that Crypto trading will establish new ways of dealing with financial instruments and this will make the current inconvenience and inefficiencies of the traditional markets stand out. There is still a lot to work on this side, but at Helvetia Fintech we are very keen to make our small contribution to shaping this new world.

Enrique Melero is an economist and programmer and has worked in financial markets for more than 20 years as an employee of Nokia, Reuters and HSBC in treasury, product development and risk management functions. You can reach him at emelero@helvetiafintech.ch or @ellocodelbitcoin on Twitter

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Bitcoin and Blockchain advocate. Idea generator in tourism, trading and ecologically friendly projects. 20years Banking and Trading systems design experience.

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