There’s a Shiny New Toy, and it’s Not Crypto CFDs

Twenty-five years ago, FX introduced the retail market to the concept of trading online 24 hours a day, which was a novel and exciting development at the time. The ability to discover prices and execute trades in real-time, even during nighttime hours, made the market feel more accessible and tangible compared to the traditional trading schedules most were accustomed to.

When I started at FXCM in 2005, phones lit up during economic announcements like non-farm payroll numbers. My first shift was midnight to 8am, and even throughout the night, traders would call in, as they could track events around the world with the ability for real time actionable news to trade on.

This newer format was exciting in retail trading, and as salespeople we did our best to educate traders on the fundamentals. We would discuss concepts making them more digestible, like how some countries' currencies are more correlated to oil. However, let’s face it, although the 24 hour, real-time nature is great, FX doesn’t have the narrative appeal like gold, oil, or equities.

Imagine a market that operates 24 hours a day, seven days a week - extending beyond the five-day trading window traders have in FX. This market is not only rich with unique narratives that attract cult-like followings and pop culture memes but is also underpinned by groundbreaking technology. It is characterized by its high volatility, and its assets can be traded, sent, and received on-demand, using just a browser, including on mobile devices.

I'm speaking, of course, about cryptocurrencies.

Access to Yields 5-20x Higher than FX Spreads

Cryptocurrencies have the same marketing benefits outlined above, but they have something else risk departments will be excited about. While the FX industry has seen profit margins compress to razor-thin levels, the crypto markets offer wide trading yields for operators. Although these large and profitable spreads will not last forever, currently the spread and commission market rates on crypto are 5-20x larger than FX spreads.

Previously, relying solely on a B-book might not guarantee profitability each month; however, by applying the same volume calculations from your current FX operations to cryptocurrency, you can reduce your reliance on volatility in a few key assets and broadly expand your profitability.

Introducing cryptocurrency to a broker’s offerings is a practical step towards diversifying risk. Many broker books are heavily concentrated on a few asset pairs, with commodities like gold often making up a large part of the revenue. As any dealer in the industry knows, especially for large parts of last year, when there's low volatility in these major assets, it can lead to challenging times.

The cryptocurrency sector, being relatively young and continuously evolving, regularly presents new trading options. This added diversity, along with the inherent volatility of cryptocurrencies, not only broadens our trading possibilities but also tends to increase profitability due to frequent and significant price movements. This strategy is about smartly expanding and diversifying the book to smooth out periods with low volatility in the popular traditional pairs.

With the higher fees, and broader choices for traders, brokers can tap into this young market, earning hundreds of dollars per million traded, even while hedging out a large portion of the overnight market risk.

To put this into perspective and looking at the data: typical retail all-in spreads in major FX pairs, often range from 1 to 2 pips under normal market conditions, which roughly yields, $100-200 per $1 million traded. In contrast, a popular cryptocurrency pair such as BTC/USD regularly experiences spreads as wide as $300 to $500 per $1 million traded, translating to a meaningful increase in yields, potentially more than doubling it.

Stay Relevant and Engage a New Audience

Perhaps most importantly, retail FX brokers can stay relevant. They gain the opportunity to tap into new customer demographics and revenue streams. For too long, brokers have relied on a graying traditional trader base while struggling to attract tech-savvy, future-focused generations.

Cryptocurrencies resonate deeply with younger, digital-native traders who prioritize transparency, autonomy, and innovation in their investment choices. This demographic values the decentralized nature of cryptocurrencies and the broader implications for financial freedom and empowerment. In fact, crypto is the fastest growing asset class in the younger generations and typically attracts those with more capital.

What conclusions can we draw from this data? That cryptocurrencies will always be disproportionately held by younger generations? Not necessarily. The wild success of the bitcoin ETFs being the fastest growing ETFs of all time show that people want to speculate on the space in a way they feel comfortable with. Not all people, even all young people, want to trade on a global crypto exchange. Just like with everything else, the brand, locality, services, and sales communications of brokers will attract the audiences they match with.

For FX brokers, this evolution creates a sense of urgency to adapt and capture this evolving market. Incorporating cryptocurrencies is not just about staying relevant—it’s about survival. In a marketplace governed by the principle of 'evolve or go extinct,' embracing digital currencies is a clear case of survival of the fittest. Brokers who act decisively and capture new demographics of traders will not only adapt but will thrive, securing their position in a financial ecosystem that increasingly rewards agility and foresight.

Transcending Beyond Conventional Platforms - Why Not CFDs?

The saturation of the market with conventional FX offerings has led many firms, including ours, to confront the limitations of an overreliance on well-known trading platforms. Despite updates and feature enhancements promised by leading platforms, the new approach has fallen short of meeting the nuanced needs of the rapidly growing retail audience towards major crypto exchanges. These exchanges have now defined standards for how crypto ought to be traded, and no longer are the standards set in the past 25 years a foregone conclusion. New traders want web based platforms, the ability to make deposits and withdrawals using the blockchain, with updates to their balances real-time, and more broadly the “crypto way” of trading, popularized by the biggest names in the crypto space.

The good news is that with the advent of cryptocurrencies, the possibility of operating additional trading platforms alongside the older platforms offers an escape route from the constraints of the familiar. By operating a trading platform in tandem with these well-trodden paths, brokerages can unlock a suite of new possibilities—enhanced liquidity management, increased trading volume, and the chance to offer fresh financial products that truly resonate with today's investors.

Final Thoughts

The facts show by all metrics, crypto trading is on the rise, and the next generation of traders are gravitating towards companies that specialize in cryptocurrency. These crypto exchanges are positioning themselves as the primary destinations for both speculative trading and long-term investments in digital currencies. If FX brokers were to survey their clients, particularly their younger demographic, they would find that many have active accounts with cryptocurrency exchanges.

Brokers now face a critical choice: evolve rapidly or risk extinction. The shift toward crypto isn't just a trend; it's a transformative tsunami. If you believe some of the largest financial institutions in the world, most financial assets will be tokenized, paving the way for all markets to be traded in the same venue with one common settlement technology. The major crypto exchanges already know this and are making decisions to attract traders who typically trade with retail FX brokers.

For retail FX brokers, the upside includes advantages in marketing, profitability, risk diversity, and relevance. The downside is the risk that the investment into the space doesn’t pay off, suggesting crypto is no longer relevant. Five years ago, that thought prevailed in traditional finance. I find fewer and fewer people believing that to be the case now.

About Ian McAfee & Shift Markets

Ian McAfee is the co-founder and CEO of Shift Markets, with over 18 years of experience in the foreign exchange and cryptocurrency sectors. Founded in 2009, Shift Markets started in FX trading infrastructure but has since embraced blockchain and cryptocurrency, aiming to make these technologies accessible to a broad range of businesses.

Under Ian’s guidance, Shift Markets provides powerful, easy-to-integrate crypto-as-a-service technology, enabling businesses to swiftly commercialize digital assets. The company helps enterprises integrate digital asset trading at its highest level, ensuring efficient adoption and superior market performance.