By Jon Matonis
Tuesday, July 11, 2017
I first met my Globitex.com co-founders Liza Aizupiete and Andris Kaneps at an inspired café in central Copenhagen during early 2015. Their mantra has always been that Globitex is a trading platform built by traders for traders. Unsurprisingly, that guiding philosophy has permeated every design choice since inception.
As my background is in foreign currency and derivatives trading, I have always aimed to launch a cryptocurrency exchange. In fact, I worked on putting together a Gibraltar-based investment group to purchase the original Mt. Gox from Jed McCaleb in early 2011, however the market proved too immature to finalise the reluctant investor commitments.
Since that time, bitcoin and other cryptocurrency exchanges have matured greatly, expanding into multiple trading pairs, margin trading, and even derivatives trading. All of this innovation has led to increasing liquidity and market depth for bitcoin trading as well ushering in the sophisticated hedging and risk management strategies desired by corporate treasurers.
So, where does the bitcoin exchange industry go from here? It already boasts one of the most predictable revenue streams in the Bitcoin ecosystem with steadily increasing volumes that generate commissions in both up and down markets. And liquidity is “sticky” giving incumbents a distinct advantage. But, traders also have a multitude of choices with at least 400 different exchanges and brokers around the world.
Three clear mega-trends are emerging in the bitcoin exchange industry: (1) an explicit distinction between global exchanges and local, or regional, exchanges; (2) a tendency towards the introduction of clearing members to diffuse the counterparty risk away from the exchange operator; and (3) increased use of margin trading and futures and options contracts.
Globitex is uniquely structured to benefit from all three mega-trends.
A global exchange aims to be a provider of maximum liquidity at the most attractive spreads. It accomplishes this by facilitating ease of trading for the greatest number of clients around the world, typically by providing the most common international transfer capabilities and trading pairs against the leading world reserve currencies.
Conversely, local exchanges will focus on a specific jurisdiction and most likely localise the language and the payment APIs for that audience specifically. Local exchanges do not facilitate global price discovery and they vary by operating model. In a broker model, the company buys and sells cryptocurrency with customers by maintaining their own inventory book and setting a bid/offer spread. Cryptocurrency brokers also do not hold customer balances like they would under a commission-based, order-matching exchange model.
The Globitex exchange provides premier banking relationships, documented trade reporting, and also supports the market standard FIX protocol for automated electronic trading, in use by professional institutional traders, brokers/dealers, mutual funds, investment banks, and stock exchanges.
With bitcoin, a clearing house can be thought of as a wholesale liquidity provider clearing transactions in an over-the-counter (OTC) market or a futures exchange. The clearing house reduces the settlement risks by netting offsetting transactions between multiple member clearing firms and by providing independent valuation of trades and collateral accounts.
Today’s bitcoin exchanges do not employ clearing members thereby consolidating the counterparty risk into a single entity rather than diffusing it among multiple clearing firms.
Globitex will eventually introduce a program for member clearing firms to process transactions on the exchange platform with Globitex monitoring the credit worthiness of member clearing firms and, ideally, establishing and maintaining a guarantee fund (for leveraged trading) that can be used to cover losses that exceed deposited collateral from a defaulting clearing firm.
In the not-too-distant future, an exchange will have to provide adequate margin trading on both the long and short side to be considered a viable exchange contender. The market demands and pressures for leverage will be too great for any exchange that wants to remain a liquidity leader.
Therefore, to facilitate margin trading, Globitex will introduce a two-way borrowing facility for bitcoin and fiat currency. Today, the most robust bitcoin lending facility is offered through the Bitfinex exchange with statistical data provided by BFXdata.
The development of a true Bitcoin economy requires the formation of capital markets with a corresponding interest rate duration curve across 1-day, 30-day, 90-day, and 1-year borrowing rates. Globitex will make a market in fiat-to-XBT swaps and XBT-to-fiat swaps for purposes of margin trading.
Additionally, Globitex will aggregate the leading interest rate markets for bitcoin to form a tradeable interest rate product on its exchange. Similar to LIBOR, the aggregated reference rate will be referred to as BIBOR [Bitcoin Inter-Broker Offered Rate], which is a term first coined in CoinTelegraph, “Bitcoin Needs Its Own Version of LIBOR.”
Globitex also intends to expand into standardised futures and options products that allow risk managers and speculators to trade the bitcoin exchange rate in the same way that they currently trade precious metals, equity indices, bonds, grains, foods, livestock, and crude oil.
Inevitably, we will see new decentralised trading methods, trustless security models and multi-signature techniques, such as threshold signatures, increasingly deployed to prevent against exchange hacks and exit scams. However, the larger trend is still towards gaining multiple entry points onto the exchange platform, because liquidity begets more liquidity.
Above all else, an exchange is ultimately defined by its integrity and the integrity of its principals over a demonstrated period of time.
Disclosure: Author is a shareholder and chairman of Globitex.