The European Securities and Markets Authority (ESMA) recently issued a warning about the high level of concentration in the crypto markets. According to ESMA, this concentration poses a significant risk to the overall stability of the market. The agency highlighted the fact that a failure of a single asset or exchange could have far-reaching consequences for the entire crypto ecosystem.
ESMA’s findings revealed that market capitalizations and trading volumes in the crypto market are heavily concentrated in a small number of assets. Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) accounted for a staggering 74% of the total crypto market cap in December 2023. This concentration continued into trading volumes, with these three assets making up more than half of the annual trading volume in 2023.
Trading Volume Concentration
The concentration is not only evident in market capitalization but also in trading volumes. ESMA noted that just 10 exchanges were responsible for handling 90% of the trading volume in the crypto market. Binance emerged as the dominant player, accounting for nearly half of all trading volume at one point. However, its market share has been declining steadily since December 2022.
ESMA also pointed out the high level of interconnectedness among individual cryptocurrencies, highlighting strong price correlations between them. Additionally, the agency identified a positive correlation between crypto and equities, undermining the notion of crypto being a safe haven asset. The lack of a stable relationship with gold further diminishes crypto’s appeal as a safe investment option.
These findings have significant implications for regulatory activities in the EU. Despite the adoption of the Markets in Crypto-Assets (MiCA) regulation in June 2023, the euro’s role in fiat-crypto transactions remained limited. ESMA suggested that MiCA rules could potentially drive growth in this area once fully implemented. Moreover, the issue of exchange location remains a concern, with many transactions occurring on exchanges based in tax havens outside of the EU.
ESMA highlighted the need for greater transparency in the crypto market, particularly in relation to exchange locations. While a significant portion of transactions take place on exchanges with an EU Virtual Asset Service Provider (VASP) license, a considerable number of transactions occur outside of the EU. The implementation of MiCA is expected to address these location-related issues through disclosure requirements, improving transparency and oversight.
The concentration of market capitalization and trading volumes in the crypto market poses serious risks to the overall stability and resilience of the ecosystem. Regulatory efforts like MiCA are crucial in addressing these concerns and promoting a more transparent and robust crypto market environment.
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