Prime Time in Crypto
November 16, 2021·0 comments·In Brief
Credit Suisse just exited prime brokerage after losing $5.5 billion on a single client. Meanwhile, Coinbase is doubling down on the exact same business model for crypto. The two markets operate on similar principles, but one group of brokers is pulling back while another is rushing in. Something about how institutional money flows through markets is shifting, and the traditional gatekeepers are conspicuously absent.
• Institutional crypto adoption is moving faster than legacy brokers are willing to move. Crypto daily trading volume sits at $150-200 billion, yet only 4% of Americans own digital assets compared to 15.2% for equities. A Fidelity survey projects institutional exposure will jump to 90% within five years, but traditional brokers are citing client demand as reason not to enter the market.
• The business model that made Goldman Sachs $3.1 billion annually in equities is now being rebuilt from scratch in crypto by companies that didn't exist five years ago. Coinbase shifted to institutional clients in 2015 and now they represent 72% of its trading volume. Galaxy and FTX are building similar infrastructure. The template works, but not the players.
• Regulation and competitive anxiety are keeping traditional brokers on the sidelines. Goldman's leadership says they can custody crypto but can't principal it. UBS calls crypto "speculation" rather than investment. Morgan Stanley watches and waits. Yet the market doesn't wait for permission.
• Coinbase's entire economics are being inverted as it matures. Right now retail customers generate 94% of trading revenue despite representing only 28% of volume. As institutional volumes grow and commissions compress like they did in equities, where retail trades went from $19.50 to zero, the revenue sources will flip. Coinbase needs this shift to stay profitable.
• The question isn't whether traditional brokers will enter crypto prime brokerage, but whether they'll be allowed to, and whether it will matter by then. Legacy brokers eventually muscled into commodities after specialist players dominated for decades. But this market moves differently, and first-mover advantage compounds faster.
Subscribe Today to Read More
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Comments
Start the discussion at the Epsilon Theory Forum...