The FTX Bankruptcy Leads to Reduced Profit Margins for Crypto Market Makers
A recent report by Bloomberg reveals that Auros, GSR Markets Ltd., and Wintermute Trading Ltd., liquidity providers in the crypto market, have experienced a significant decline in profit margins following the bankruptcy of the FTX exchange. This event has served as a wake-up call for the entire industry, prompting market makers to reassess their risk profiles.
Diversification and Securing Digital Assets Away from Trading Platforms
In response to the FTX bankruptcy, market makers are advised to diversify their operations and store their digital assets away from trading platforms. Auros highlights that utilizing intermediary services for collateral storage can lead to a decline in profitability by 20%-30% compared to leveraging coins directly on a trading site.
Market Makers Shift Focus to Bitcoin and Ether
Meng Hwee Neo, managing director at GSR Markets, explains that market makers are now adopting a “flight to quality” strategy, focusing more on Bitcoin and Ether. While this may result in slimmer profit margins, it opens up greater volume and business opportunities.
Plummeting Spot Trading Volumes on Centralized Crypto Exchanges
According to CCData statistics cited by Bloomberg, monthly spot trading volumes on centralized crypto exchanges have plummeted by 74% since January 2022. In August 2023, the volume dropped to $445 billion, highlighting the challenges faced by market-making firms like Jane Street Group and Jump Crypto.
Repercussions Extend Beyond Market Makers
The impact of FTX’s insolvency reaches beyond market makers. Even entities like BlockFi, which went bankrupt, admitted to disregarding risk management advice and suffered consequences. The entire crypto sector is facing challenges due to low trading volumes, increased volatility, and regulatory scrutiny on exchanges such as Binance Holdings Ltd. and Coinbase Global Inc.
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