Digital currencies will experience a sharp increase in trading activity over roughly the next decade, initial coin offering advisory firm Satis Group wrote in an industry report. The report, which was released in September 2018, called for a 50% increase in this activity through 2019 with continued expansion after that.
This increase in trading volume could have several implications. For starters, rising trading could bring about higher prices. However, the opposite could happen, as surging trading activity could precipitate a sharp drop.
An uptick in trading could bring about other changes such as lower bid-ask spreads, a development that could prove advantageous for investors.
Trading volume is forecasted to rise in the coming years, increasing 50% through 2019 and then continuing to expand, experiencing a 9% compound annual growth rate (CAGR) through 2028, according to the Satis Group report. As a result, this key measure is expected to more than double from US$7.3 trillion in 2018 to US$17.8 trillion in 2028.
Because of this robust activity, the volume of digital currency trading was on track to surpass that of U.S. corporate debt trading in 2018, according to the report. Further, the analysts indicated that the cryptocurrency market's trading volume was on schedule to reach roughly 10% of the U.S. equity market.
Lowering Bid-Ask Spreads
One potential benefit of rising trading volume is that it can reduce the bid-ask spread, which is the difference between the bid (the amount a would-be buyer is looking to pay) and the ask (the amount a would-be seller wants to receive).
When a security (or in this case, digital currency) benefits from significant trading activity, it can result in a small spread.
For the most part, day traders prefer small spreads, because it increases the chances they will be able to buy or sell the underlying asset at the price they want. If spreads get too high, traders may be hesitant to make transactions and instead wait until spreads decline.
More Accurate Price Discovery
Digital currencies with higher trading volume also benefit from more accurate price discovery, which is the process of determining the price of an asset. If only a few people are trading an asset—for example, a digital currency that is not well known—then its price is being determined by a small group of people.
If an investor buys 100,000 units of XYZ coin for US$1 apiece, and then they double in price, he or she would have US$100,000 worth of unrealised gains. However, if the trading volume of the XYZ coin is 10,000 units per day, it may take the investor 10 days (or more) to sell his or her digital tokens. By the time the 10 days have ended, the coin's value may have dropped significantly.
If an investor takes the same action, and trading volume rises significantly, he or she may have a far easier time unloading his or her XYZ coins at a preferable price and therefore realising appealing gains.
One benefit of securities (or digital currencies) with high trading volume is that they are less susceptible to market manipulation.
If a cryptocurrency, for example ABC coin, is being traded by only a handful of investors, it makes it easier for a large investor (or group of investors) to push ABC coin either higher or lower.
A large investor could, for example, place a single outsized sell order and seek to push a certain asset's value lower. This type of effort may be far more effective if the asset in question is thinly traded.
Alternatively, a single investor could place a substantial buy order in an effort to increase an asset's price. Once again, such a move may prove significantly more effective if focused on an asset that is experiencing little trading volume.
Digital currency trading volume will surge in the coming years, according to a Satis Group report. If this prediction proves true, it will mean a more than 100% increase in cryptocurrency trading volume between 2018 and 2028.
An increase in digital currency trading activity could result in several positive outcomes, including lower bid-ask spreads, more effective price discovery and reduced risk of market manipulation. These are positive developments for traders that may also help encourage new investors to get involved.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…