Today, almost every CFD brokerage lists crypto as one of their available asset classes, complete with the famous Bitcoin and Ethereum logos in their marketing materials. However, not many of these brokers actually generate all that much in terms of volume from their crypto offerings. In this article we’re going to look at why, and make a few suggestions as to how you can remedy the situation by better understanding the market and thinking outside of the box.
Problem 1: Too Many Coins
The first problem is what to list. Brokers pride themselves on their number of available assets, but there are more cryptocurrencies in existence than all of their other symbols combined. You can tell when most brokers added their crypto CFDs by the coins they’ve chosen to list. Obviously, everyone has added BTC and ETH, but very often the rest appear to be a selection of around 10-20 of the largest projects by market cap at the time the decision to add crypto was made. Many of these projects have since fallen from prominence, and new coins have emerged to replace them. This leaves CFD crypto offerings almost always looking dated and irrelevant, especially to anyone in the know.
Problem 2: Difficult to Manage Risk
Another problem is that crypto can be a nightmare for CFD brokers from a dealing standpoint. It’s volatile, the space is always changing, and it’s relatively illiquid compared FX. This makes crypto difficult for CFD brokers to hedge effectively against, which is partly why many of them have treated it as something of an afterthought.
Problem 3: Attracting Traders to Crypto CFDs
Finally, from the perspective of the end trader, you have to wonder why anyone would choose to trade a crypto CFD when they can just as easily buy and take possession of the asset they want through a crypto exchange.
Solution 1: Play to Your Strengths
It’s important for CFD brokers to understand the advantages they have over crypto exchanges and to focus on these. In response to problem 3, the costs associated with trading CFDs are much lower than trading crypto over an exchange. For shorter-term traders who need to get in and out repeatedly, these costs can really add up, so a well-managed crypto CFD can actually be a better bet.
Also, the nature of CFD trading allows you to offer an aggregated price that represents the broader market of a crypto asset rather than any individual siloed order book. This gives you the ability to offer a feed that’s absent from the spikes of individual exchanges, at a lower price per round trade. You need to publicise these things!
Solution 2: Synthetic Assets
In our view, synthetic assets provide a convincing solution all the above problems. CFD brokers are well-accustomed to working with and managing the risk of synthetic baskets. By creating thematic baskets for the crypto space, just like you may have already done with stock market sectors like FAANG stocks or gold miners, you can create an asset that’s more recognisable, less volatile, and attractive for crypto outsiders and insiders alike.
Just as stock indices smooth out the volatility of any one individual company by allowing for exposure to the entire market, crypto baskets create and offer the same kind of broad exposure and are likely to generate much more interest from your clients than just the smattering of random names you have on offer.
For example, everyone has at least heard the word DeFi by now, even if they don’t fully understand it. A CFD that tracks an underlying basket of DeFi assets can be constructed and offered relatively easily. It could include a mixture of the current leaders in the space such as Maker, Aave, Compound and Uniswap, and could be updated to always include the projects with the largest market caps. A basket such as this could even include projects from rival chains when their TVL (total value locked) begins to grow.
Another example of a thematic crypto basket could be a collection of proof-of-stake projects. Many people are learning about how proof-of-stake is becoming a capable rival to bitcoin’s proof-of-work consensus mechanism. You could construct a basket to give your clients exposure to this segment. For instance, a basket that includes notable proof-of-stake cryptocurrencies such as Ada, Polkadot, Tezos and more, or a rival basket that includes the top proof-of-work currencies such as bitcoin, bitcoin cash, litecoin, etc.
The bad news is that in the current landscape, you need more than just the addition of a price feed on your platform to entice traders. The good news is that you’re only really limited by your ability to find the narratives that are gaining mind share and constructing accessible baskets to represent them. If done properly, not only can it lead your existing traders to branch out into crypto, but you can also attract crypto traders to your services based on their efficiency and cost-effectiveness.
If you would like to discuss crypto CFD strategies further, or possible indexation methodologies for crypto baskets, please don’t hesitate to contact one of our success managers.
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