Published
Many British investors may prefer to trade Bitcoin on unregulated cryptocurrency exchanges despite the recent listing of crypto products on the London Stock Exchange, an academic has cautioned.
The London Stock Exchange’s listing of Exchange-Traded Products (ETPs) in May marked a significant milestone for the cryptocurrency sector. After 15 years of evolution, cryptocurrency seemingly moved from teenage rebel to market establishment respectability. However, only professional investors can trade these ETPs, leaving retail players out in the cold.
Dr Tatiana Franus, a lecturer in finance at Bayes Business School, who has researched the Bitcoin market, says that some of those investors will continue to participate in crypto markets through overseas exchanges. They will prefer that, she says, to handing their money over to a trader able to buy and sell ETPs that include Bitcoin.
FCA allows Bitcoin trading - but with guard rails
The UK's Financial Conduct Authority has paved the way for the first listing of cryptocurrency exchange-traded products on the London Stock Exchange. This decision marked a significant shift in the regulator's stance, reversing its previous ban on such offerings in 2020.
The approval could lead to greater institutional adoption of cryptocurrencies in the UK.
This decision sets the UK apart from many other markets, such as continental Europe, Australia, Brazil, Canada, Hong Kong, and the United States, where crypto ETPs are available to both retail and institutional investors.
Dr Franus was speaking as one of the world’s largest crypto conferences, Bitcoin 2024, in Nashville gets underway – with scheduled addresses from Donald Trump (Saturday 27 July), Robert F. Kennedy Junior and Edward Snowden (remotely from Russia).
Having researched how information is factored into prices on fragmented markets, Dr Franus believes this approval will accelerate the integration of crypto ETPs into mainstream financial markets, making them accessible to a broader range of investors.
As the market for these products expands both geographically and in terms of trading volume, she believes, we could see increased liquidity and more stable price discovery mechanisms. Liquidity refers to how quickly and easily an asset (crypto coins) can be converted into cash without significantly affecting its market price.
Dr Franus’s paper, "Price Discovery Between Bitcoin Spot Markets and Exchange-Traded Products," is thought to be the first study to empirically examine the price dynamics of Bitcoin ETPs in relation to the spot market. She says the globalisation of crypto asset trading through regulated ETPs should lead to a more mature and stable cryptocurrency market overall.
Traditional markets, such as the London Stock Exchange, allow investors to directly buy and sell assets such as stocks or funds, now including Bitcoin ETPs. People who trade on centralized crypto exchanges invest in crypto coins directly (Bitcoin is one of more than 9,000 active cryptocurrencies). They own a 'wallet' where they can see the crypto coins they have and can sell them as they want.
However, institutional investors must rely on Bitcoin ETPs to gain exposure to the underlying asset without holding Bitcoin directly. Dr Franus suggests that the increasing acceptance and integration of ETPs are paving the way for broader adoption and stabilisation of cryptocurrency markets.
Small investors want to react quickly
Dr Franus found that more than 90% of information impacting on Bitcoin prices stems from centralised crypto markets. Players in the Bitcoin market can respond to information more quickly, and the volume and liquidity are higher. This makes spot crypto markets more attractive to informed investors, she says, as they can react fast to new information – and such markets are open round the clock.
“The Bitcoin spot market is 56 times more liquid than Bitcoin ETPs. Traders can gain exposure to Bitcoin's price movements through ETPs, which behave similarly to holding Bitcoin itself. However, investors prefer to trade in spot markets due to the higher liquidity.”
She hopes her research will establish that regulating cryptocurrency can be beneficial for those less comfortable with trading on the unregulated crypto exchanges.
“Regulators often create significant barriers for cryptocurrency trading, often not recognizing it as a legitimate market. Their concern lies in the potential for fraudulent activities, which are prevalent in grey markets.
“However, it's important to note that the crypto trading community has matured; many individuals are actively engaged in trading. The world should adopt a balanced approach, integrating both openness and regulation to foster a secure and innovative trading environment.”
