Foresight Ventures For i Vent r July 2022 A Joint Report by Boston Consulting Group, Bitget and Foresight Ventures What Does the Future Hold for Crypto Exchanges?
*Disclaimer: This report does not constitute investment advice or recommendations and is not a solicitation or an offer to purchase or sell securities. The information contained herein is only as good as of the date and time of publication; we do not undertake to advise of any changes in the opinion or information contained herein.
Tony Cheng General Partner, Foresight Ventures & Head of Corporate Development, Bitget “The crypto market has seen significant progress over the past few years. We have seen the market mature significantly as global user penetration grows with new use cases being built out for Web3 and institutional flows increasing allocation to this new asset class. We believe that as this market develops, even though there will be significant value distributed across all parts of the value chain, the gateway through which users access crypto (including exchanges and wallets) will see the largest value accrual. Being able to act as a one-stop shop is still needed in many developing countries as these users still are transitioning towards Web3. At Bitget and Foresight Ventures, we are betting on a future where Web3 is distributed globally and access is made easy through mobile native experiences. Our goal is to create a vibrant ecosystem that transcends Web2 and Web3, that connects CeFi and DeFi, resulting in an expansive bridge to the vast web of crypto. With this report from BCG, we hope that the deep insights from this report can help users better understand the global exchange landscape as well as the global growth opportunity for the gateways of crypto.” Tjun Tang Managing Director & Senior Partner, Boston Consulting Group “Despite the recent market disruption, we believe the market has opportunities for growth ahead. Crypto exchanges play a key role in the Web3 ecosystem by providing access, liquidity, and infrastructure. With competition intensifying, crypto exchanges must adapt to the dynamic market situation and transform their strategy to beat the competition. In this report, we offer perspectives on the future of Web3 adoption, emerging high potential markets, and the crypto exchange competitive landscape and future end-state. We highlight unique growth opportunities that crypto exchanges can explore: strengthening and scaling core offerings; expanding into adjacent products and offerings; developing innovative business models; and leading the way in bringing Web3 solutions to traditional industries.” Foreword
Contents 1. Executive Summary 1 2. Crypto Adoption and Future Growth Potential 4 2.1 Crypto Economy Is Here to Stay 4 2.2 Crypto Still at the Beginning of the Adoption Curve 5 2.3 Three Macro Trends Impacting the Growth of Crypto Exchanges 8 2.4 Centralized Crypto Trading: A Large Market Opportunity 16 3. Crypto Trading Hot Spots 19 3.1 Global Crypto Growth Region Trading Overview 19 3.2 Latin America 20 3.3 Africa 21 3.4 Middle East 23 3.5 APAC — Southern Asia 24 3.6 APAC — Northern Asia & Oceania 25 4. Crypto Exchange Competitive Landscape and End-State Perspective 26 4.1 CEX and DEX: A Future of Co-Existence and Increased Convergence 26 4.2 What Is the Key to Winning over Crypto Traders Today? 28 4.3 How Has the Crypto Exchange Competitive Landscape Evolved? 30 4.4 What Is the Endgame for Crypto Exchange Competition? 31 5. Crypto Exchange Playbook for Growth 35 6. Conclusion 39
Boston Consulting Group, Bitget & Foresight Ventures July 2022 1. Executive Summary Crypto has come a long way in a short time. Over just a few years, the number of use cases has soared, and a deeper, more mature ecosystem has emerged. Through this process, the technology has grown from little more than a concept to becoming a key infrastructure, supporting applications across finance, commerce, gaming and social media. Despite recent disruptions in the crypto market and regulatory headwind, we believe it is still early innings for blockchain technology and crypto. This joint report by BCG, Bitget and Foresight Ventures provides a relatively comprehensive view of the crypto market landscape, with a focus on the future of crypto exchanges given their integral position as the first gateway for Web3 users. We start by highlighting the maturing of the crypto economy, with an increase in institutional inflows, the rise of Web3 applications that bring potential disruptions to all industries, and the rapid growth of crypto adoption in emerging markets. These factors have contributed to the formation of a $54 trillion global crypto trading market in 20211 with significant future headroom to grow. Spot trading will be driven by two interrelated opportunities: 1) Increasing use of crypto as an asset class and a potential hedge against inflation, and 2) Crypto becoming a productive asset, serving as key infrastructure supporting a variety of Web3 applications. And as more institutional investors enter the crypto market, derivatives trading is expected to outgrow spot trading (i.e., crypto derivative-to-spot ratio to increase from its current level and become closer to traditional finance benchmarks). Based on our analysis, we have identified significant crypto trading growth potential in emerging markets and advanced APAC economies by benchmarking against traditional 1 Crypto trading for spot and derivatives on centralized crypto exchanges. What Does the Future Hold for Crypto Exchanges?
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 2 equity trading. We see LatAm and APAC as the two most attractive regions, and it is likely that we will see further expansion of global exchanges, given the high market potential along with relatively progressive local crypto regulations. We then shed light on the crypto exchange trading landscape, which has seen trading volumes dominated by centralized exchanges, historically due to ease of use, better liquidity/trading execution and better regulatory compliance as compared with decentralized exchanges. Going forward, we expect to see trading volume growth in both centralized and decentralized exchanges, as they serve different customer needs. Centralized exchanges provide ease of entry and better trading executions for top, large-cap coins, while decentralized exchanges democratize access to decentralized finance (DeFi) innovations by offering investors access to long-tail tokens and having better composability with decentralized applications. Based on our customer interviews, we categorize target customers of centralized exchanges into four groups: retail traders, high-net-worth traders, proprietary trading firms, and corporations where institutional investors contributed 60–70% of the overall trading volume. We identified five key purchasing criteria: 1) Trading platform robustness including liquidity, security and reliability, 2) Cost structure, 3) Platform vibrancy that includes number of assets covered, breadth of product types and trading tools, 4) Regulatory compliance, and 5) Brand awareness. We have seen leading exchanges consolidating their leads in both spot and derivative trading markets by leveraging their scale to outperform competitors in customers’ key purchasing criteria. The top five crypto exchanges accounted for around 70% of the spot trading volume and around 90% of the derivative trading volume in 2021. However, similarly to how the traditional finance market landscape has evolved historically, regulation will also play an important role in shaping the competitive end-state and preventing winner-takes-all-situations. The recent market downturn has accelerated policymakers’ agenda on stricter oversight and tighter regulations. We took an in-depth, scenario-based approach to analyzing the likely outcomes of crypto derivative market regulations and how regulations would impact the competitive landscape in different regions, as derivatives drive significantly more trading volume and are under tighter regulations compared to spot in most jurisdictions. Based on our analysis, we estimate a competitive end-state in which the top five exchanges take a 65–75% share of spot trading globally. We expect the top five exchanges to take an 80–90% share of derivative trading in emerging markets and a 70–80% share of derivative trading in developed economies due to tighter regulatory environments and competition from local regulated players.
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 3 Lastly, we outline various growth strategies that crypto exchanges can explore in this fast-evolving market and share best practices from industry leaders. In the short-to-medium term, crypto exchanges should focus on strengthening product offerings by tailoring to their core customers and expanding to emerging markets. In the medium-to-long term, crypto exchanges should explore a combination of different growth tactics ranging from expanding into adjacent fields such as NFTs and DeFi, leveraging exchange tokens to bootstrap ecosystems and user growth, and expanding into traditional finance, especially in emerging markets where financial infrastructure is relatively immature and crypto has the potential to surpass traditional finance. Crypto exchanges can tap into emerging market opportunities by offering crypto-backed services such as loans, remittance, payment services and tokenized stock trading to local customers.
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 4 2. Crypto Adoption and Future Growth Potential 2.1 Crypto Economy Is Here to Stay Despite the recent crypto market slowdown, we believe that crypto economy is here to stay. The top 20 coins today look very different from just 5 years ago. Among these is Layer 1 tokens, which can validate and finalize transactions without the need for another network. Overall, the crypto ecosystem has matured significantly, with around 10,000 applications today, compared to 800 in 20172. (See Exhibit 1.) In addition, institutional money has poured into the asset class, leading to lower volatility and a maturing market profile. According to Coinbase’s annual company filing, the institutional trading volume share has increased significantly from 20% in 2018 Q1 to 68% by the end of 2021. As observed by research analysts at Andreessen Horowitz, crypto prices drive interest, which drives ideas and activity, which in turn drive innovation. The 2017 ICO boom led to the emergence of crypto exchanges that are leading the market today. (See Exhibit 2.) 2 Source: DappRadar, as of January 2022. 50% 70% 9 10 1 L1 Dapps Currency2 4 9 5 2 Dapps Meme L1 Currency2 0.053 0.039 ~800 (most in early concepts) ~10,000 20% (2018 Q1) 68% (2021 Q4) 2020-2021 crypto boom driven by increased utility & use cases around smart contracts as L1/L2 blockchains functionalities & development ecosystem support better compared to 2017-2018 Crypto mainly as tech concept and store of value with limited support for developers/ecosystem & few use cases Crypto as key infrastructure empowering a variety of different use cases (e.g., DeFi, GameFi, NFT, etc) Increased institutional adoption & decreased volatility of the crypto market show early signs of market maturing Description Top 20 coins by category1 % Institutional trading volume on Coinbase Volatility3 # of application Smart contract development support/applications Smart contract development supports/applications 2017-2018 2020-2021 Key Observations EXHIBIT 1 | Crypto Economy Is Here to Stay with Increased Utility and Maturity Sources: Coinmarketcap.com; DappRadar; The Block; Yahoo Finance; stateofthedapps.com; BCG analysis. 1 Top 20 coins by market cap in Dec. 2017 and Jan. 2022. 2 Serve as digital currency/digital currency payment infrastructure. 3 Volatility calculated as the average 60-day BTC/USD volatility between Jun.2017.6-Jun. 2018 and Jan. 2021- Dec. 2021.
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 5 2.2 Crypto Still at the Beginning of the Adoption Curve Crypto adoption is rising among both retail and institutions. However, adoption is still low compared to traditional investment assets such as equities, payment technologies and private equity allocation by institutions. BCG estimates that just 0.3% of individual wealth is currently held in crypto assets, in contrast to the 25% that is held in equities. (See Exhibit 3.) Relatively shallow penetration indicates that there is headroom for growth. For retail cryptocurrency holders, there are significant discrepancies across geographies. North America is the most invested geography, with an average holding of around $18,000 among crypto holders, accounting for 0.4% of total individual wealth. Africa is the least invested, with an estimated average crypto holding of around $190. If we use the number of cryptocurrency holders as a proxy for Web3 users, and benchmark it against the adoption rate of Internet users in the 1990s, the message is clear: there is plenty of growth to come. (See Exhibit 4.) While it is difficult to predict, if the trendline of crypto adoption continues, the total number of crypto users is likely to reach 1 billion by 2030. Est. Est. Top crypto spot exchanges by volume Top crypto derivatives exchanges by volume Global monthly spot trading value by exchanges ($Bn, Apr. 2022) Global monthly derivatives trading value by exchanges ($Bn, Apr. 2022) 1,002 258 465 109 48 Total Binance Okex 49 72 Coinbase FTX Kucoin Others 3,150 235 515 Binance Bybit Total 294 FTX 1,628 Okex 287 192 Bitget Others 2017 2013 2012 2019 2017 2017 2013 2018 2019 2018 EXHIBIT 2 | Leading Exchanges Mostly Originating from Previous Crypto Booms Sources: The Block; Coinglass; BCG analysis.
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 6 Institution Retail Crypto Benchmark % of users/funds % of AuM ~2%1 <0.1% Cryptocurrency holders as % of total population Digital payment global penetration % Institutional investors having crypto as part of their portfolio Crypto as % of institutional investor AUM Equity as % of individual wealth Crypto assets as % of individual wealth Private equity as % of institutional investor AUM % European Institutional investors having PE as part of their portfolio ~4% (~300Mn) 0.3% (~$700Bn) ~8% ~4% ~50% ~25% EXHIBIT 3 | Adoption Is Gaining Traction Across Retail & Institutional Investors Sources: Crypto.com; Bridgewater; Fidelity; BCG Global Wealth Market Sizing 2021; OECD; PwC Report; Mercer; Statista; Iconic fund research; BCG analysis. 1 Current adoption of cryptocurrency across Asia, US and EU for pension funds, traditional hedge funds and endowments & foundations. 1.0 1992 1998 1993 1994 1999 1995 1996 1997 2000 2001 10.0 2006 2002 0.1 2003 2004 100.0 2005 100.0 1,000.0 10,000.0 0.1 1.0 10.0 1,000.0 10,000.0 Internet Users Ethereum Addresses with Non-zero Balance Cryptocurrency Holders 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Web 3.0 is here–we are early in this journey Amazon Yahoo Fanatics eBay Expedia Rakuten GoDaddy Netflix Tencent Google PayPal Salesforce Alibaba Baidu Wayfair Bet365 Palantir LogMeIn Facebook Service Now Unity Workday Shopify Spotify Twitter Tech company examples 1 Billion Internet Users Cryptocurrency Holders (Mn) Internet Users (Mn) Sources: Crypto.com; Cambridge Centre for Alternative Finance; Coin Metrics; World Bank; Company websites; BCG analysis. Note: The chart is in log scale. EXHIBIT 4 | Retail Adoption Still at the Beginning of the Curve
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 7 While individual investors are the biggest holders of crypto, institutional interest is growing, albeit unevenly. (See Exhibit 5.) Among institutional investors, hedge funds and venture capital firms are most willing to invest. According to Crypto fund research,3 these players had almost doubled their exposure to $70 billion (the actual crypto holding will be several times higher following token appreciation since the investment) from the fourth quarter of 2020 to the end of 2021. We expect allocations to continue to rise. There is also an expanding class of crypto-native funds (e.g., Paradigm, Hashed) that are picking up momentum. Traditional private equity funds are also getting bullish on crypto. For example, Bain Capital announced its decision to open a crypto fund in March 2022. Corporations including Tesla, Square, and business intelligence company MicroStrategy have bought cryptocurrency as either an asset or a hedge. Meanwhile, payment companies including PayPal, Mastercard and (again) Square are starting to offer users the opportunity to transact with crypto. If the market continues to stabilize, more corporate investment is likely, alongside rising investment in other Web3 technologies. 3 Source: https://cryptofundresearch.com/q4-2021-crypto-fund-report/. Corporations/ banks Pension funds Government funds Individual Investor Hedge fund/ Venture capital 2021 Crypto AUM ~$2.5 billion2 ~$1 billion ~$4 billion (US)3 ~$713 billion ~$69 billion+ (nominal)1 (Multiple time considering capital gain) 2021 Total AUM $~20trillion4 ~$61 trillion ~$5 trillion (US) ~$263 trillion $~4.3 trillion Crypto % share ~0.01% <0.01% <0.01% ~0.3% ~1-2% High Low Risk tolerance / willingness to adopt crypto Future outlook Sources: Crypto fund research; Fortune; US Treasury; BCG analysis. 1 Crypto AuM includes crypto hedge funds, crypto venture funds, private equity and others. 2 Holding of BTC of Fortune 500 companies at the end of 2021. 3 Holding of BTC by US government as of Feb. 2022. 4 Total asset of non-financial Fortune 500 companies. EXHIBIT 5 | Institutional Adoption Is on the Rise and Becoming More Diverse
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 8 Top banks are investing in crypto- and blockchain-based projects, as well as providing crypto custodian services. Morgan Stanley began offering its wealth management clients access to Bitcoin funds in March 2021, and BNY has invested in the Fireblocks platform, which allows financial institutions to issue, move and store cryptocurrencies. J.P. Morgan was the first bank to launch an in-house BTC fund and has focused on developing digital blockchain assets. Pension funds are among the most risk-averse investors, but even these are starting to obtain exposure to crypto, often through ETFs, or indirectly through investment in blockchain companies. One prominent example is the Ontario Teachers’ Pension Plan investing in crypto exchange FTX. One reason for rising institutional interest is that crypto currencies such as Bitcoin can be a useful hedge against inflation and offer a low correlation with other asset classes. In addition, performance over recent years has exceeded that of other major assets classes. The S&P 500 in 2021 returned 29%, compared to Bitcoin’s 62%. The emergence of a range of trading and management tools is also supporting institutional adoption. 2.3 Three Macro Trends Impacting the Growth of Crypto Exchanges As crypto adoption continues to increase, three macro trends that impact the growth of crypto exchanges start to emerge. (See Exhibit 6.) 2 3 1 Market has become more sophisticated with derivatives to spot ratio increasingly driven by increasing institutional flow Demand for crypto derivatives trading likely to grow further as market mature and will be a key revenue stream for exchanges Breadth of exchanges’ asset coverage and ability to provide users with access to Web3 applications will be important future differentiations Rapid development of Web3 applications brings significant disintermediation potential to all industries and pushes up volume for altcoins Developing economies leading the way in crypto adoption with trading volume in these areas seeing large increase in 2021 Emerging markets expect to become key battleground for global exchanges and provide innovation ground for crypto use cases due to immature local financial infrastructure Increased Institutional Participation Rise of Web3 Emerging Markets Adoption Key crypto macro trends Implication for crypto exchanges EXHIBIT 6 | Crypto Macro Trends Impacting Crypto Exchanges
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 9 Trend 1: Crypto Trading Market Becomes More Sophisticated with Increased Institutional Participation Global trading volumes have increased significantly over the past two years. (See Exhibit 7.) Global quarterly spot trading volume grew sevenfold to $3.2 trillion in the two years to the first quarter of 2022. Crypto derivatives trading expanded twelvefold to $6.3 trillion. Crypto derivative trading has historically been dominated by perpetual swaps for Bitcoin and Ether. These still account for over two thirds of open interest among the top 100 derivatives.4 Perpetual swaps are crypto-native innovations first introduced by the crypto exchange BitMEX. They are closely related to traditional cash-settled futures, but with no expiration date. This means there is no need to periodically roll over or cash-settle contracts. In addition, perpetuals can be traded on margin with considerable leverage (some exchanges offer beyond 100x leverage). Perpetuals maintain their price to the underlying’s spot price through what is known as a funding rate. There are other types of crypto futures that are more similar to cash-settle, quarterly futures. Given the similarity between dated futures and perpetual swaps, we use the term future to cover both perpetual swaps and futures with a fixed maturity date. 4 Source: Coinglass, Top 100 Derivatives by Open Interest as of May 2022. Quarterly spot trading volume grew sevenfold since 2020 Q1 Quarterly Derivative trading outpaced spot trading growing twelvefold since 2020 Q1 Total centralized exchange spot trading volume ($Bn) Total centralized exchange derivative trading volume ($Bn) 498 3,251 2020 Q1 2022 Q1 537 6,377 2020 Q1 2022 Q1 ~12X ~7X Sources: The Block; Coinglass; BCG analysis. EXHIBIT 7 | Crypto Trading Volume Increased Sharply Driven by Increased Crypto Adoption from Both Retail and Institutional Investors
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 10 The ratio of derivatives to spot volumes helps us understand how these markets compare. Derivatives volume is measured in notional terms, which can be misleading,5 but there is still value in the comparison in understanding the direction of crypto trading. The Bitcoin futureto-spot ratio rose from 4 at the start of 2020 to 8 in February 2022. The Ethereum future-tospot ratio more than doubled from 2 to 5. (See Exhibit 8.) A related factor is the inflow of institutional capital into the futures space, which can be indicated by an increase in both open interest and trading volume for Chicago Mercantile Exchange (CME) crypto futures. The institutional investors trading crypto derivatives today are mostly prop trading firms. They may prefer to participate in crypto markets via derivatives for several reasons. • More trading strategies. Derivatives allow prop trading firms to engage in more trading strategies. For example, crypto options allow traders to create a straddle to speculate on volatility. Crypto futures allow traders to create a basis trading strategy by buying crypto and selling a future against it to capture the interest from the difference between spot and future. • Higher capital efficiency. Margin allows prop traders to hold positions with margin (only a portion of the position value), which means they can more efficiently allocate capital. 5 See “CoinDesk: Crypto Derivatives: On misleading measurements”. The overall BTC/ETH future to spot ratio has reached record high since 2020 … … with strong institutional adoption also observed in the regulated future market BTC/ETH future to spot ratio (Mar. 2020 -Feb. 2022) Volume and Open interest of CME Bitcoin futures ( Jun. 2020 –Mar. 2022) 5 4 8 Jan-21 Oct-20 Apr-20 Jul-20 Apr-21 Jul-21 Oct-21 Jan-22 0 5 10 ETH BTC 1.5 40 0 3.0 120 80 4.5 0.0 Jun-20 Feb-22 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Aug-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Mar-22 CME Open Interest CME Volume ($Bn) ($Bn) 2 Sources: The Block; Coinglass; BCG analysis. EXHIBIT 8 | BTC/ETC Future to Spot Ratio Increases as Customer Mix Shift Towards Institutional Investors
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 11 • Better risk management. A prop trader may use a Bitcoin future to hedge away risk of the BTC/USD price movement between now and future expiry. • Simplicity. Cash-settled derivatives allow investors to gain direct exposure to crypto without owning crypto assets and worrying about custody. • Tax efficiency. In some jurisdictions, derivatives trading carries tax benefits. For example, in the US, 60% of gains on derivatives contracts are taxed as long-term capital gains regardless of the duration of the contract. Benchmarking against exchange-traded equity, gold and foreign exchange, we see signifi- cant room for growth in crypto derivatives trading. The crypto derivative-to-spot trading ratio is lower than US equity, global exchange-traded gold and global foreign exchange, primarily due to the relative immaturity of the crypto market and lower institutional participation. (See Exhibit 9.) Spot Market cap / Deriv. Open Interest Annual Spot trading value (OTC) Annual Derivative trading value6 (OTC) Annual Future trading value6 Annual Options trading value6 Spot trading velocity7 (OTC) Derivative trading velocity7 Derivative: Spot trading value ratio $2.25 Tn3 / ~$30 Bn3 $52.2 Tn / - ~$590 Bn / ~$107 Bn ~$100 Tn4 / ~$448Bn ~$20.6 Tn ~$124 Tn ~$0.95 (19) Tn (~$725) Tn ~$32.9 Tn ~$509 Tn ~$13.7 Tn $56 ( ~$1600) Tn ~$32.5 Tn ~$166 Tn ~$11.4 Tn ~$52 Tn ~$0.4 Tn ~$343 Tn ~$2.5 Tn ~$4 Tn ~9.2 ~2.4 ~1.6 (~32) (~7) ~1083 - ~128 ~125 ~1.6 ~4 ~15 ~2.38 Crypto 2021 US Equity1 2021 Global Gold 20212 Global FX 2019 Comparison with other exchange traded spot and derivative products Sources: Coinmarktecap.com; The Block; WEF; The World Gold Council; Companies market cap; BIS; BCG analysis. Note: (OTC) indicates trading value facilitated with OTC venues; Trading value US exchanges which do not report trading value to WFE is estimated based on top contracts traded. 1 Exchange traded equity, equity derivatives include exchange traded, standardized derivative products including single stock derivative, single stock future, stock index future, stock index derivative, and stock ETF derivative. 2 London Gold Market trading value excluded as it’s an OTC market. 3 Crypto market cap and open interest as end of 2021. 4 Global M2 supply as of March 2022. 5 Estimated based on daily trading value of Shanghai Gold Exchange, the largest physical exchange for gold and gold-backed ETF spot trading. 6 Notional value. 7 Trading velocity calculated as trading value divided by market cap for spot and open interest for derivatives. 8 OTC derivative and spot trading value. EXHIBIT 9 | The Crypto Derivative Market Has Growth Potential
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 12 However, crypto spot and derivative turnover velocity are much higher than that of traditional finance. This is due to higher arbitrage volume caused by price discrepancies between exchanges and regions, the operations of decentralized applications, the fact that crypto exchanges operate around the clock, and the availability of leverage. The rise of smart contract-based altcoins means crypto assets are gradually taking on the attributes of productive assets. Ethereum is developing into a cross-over asset, amid a unique blend of equity, commodity and monetary characteristics. In just a few years, it has generated $10 billion in transaction fees. That same feat took Amazon twice as long to accomplish. In the third quarter of 2021, Eth tokens took on productive asset features: through a governance process, Ethereum, activated a “token burn” revenue share mechanism to distribute transaction fees to miners and Eth tokens holders. The native tokens of leading decentralized applications are also taking productive asset features. Sushiswap, a leading decentralized exchange (DEX), distributed a platform fee among liquidity providers and governance token holders. Compared with other productive assets, we see a significant growth opportunity for crypto market capitalization of about $1.2 trillion.6 According to the World Federation of Exchanges, Global equity market capitalization was around $106 trillion in 2020, while the global bond market was worth about $124 trillion in 2020 based on a SIFMA estimate. Global real estate value was estimated to be $326 trillion in 2020 by Savills Research. Trend 2: Rapid Development of Web3 Applications Brings Significant Disintermediation Potential and Has Led to an Increase in the Trading Volume of Altcoins In the initial iteration of the internet (Web1), users consumed digital content created by publishers or third parties. Web2 allowed users to both create and consume content, but centralized networks continued to control (and make money from) distribution. In the emerging Web3 iteration, users consume, create and own content. In this phase, networks (and money exchanged) are decentralized, with blockchain technology replacing centralized intermediaries and providing the trust that enables both consumption and exchange. There are numerous players emerging across different stacks of the crypto ecosystem looking to disrupt value pools currently held by Web2 applications. (See Exhibit 10.) For example, Audius is a decentralized protocol for music streaming that allows creators to earn tokens by uploading music and curating playlists while eliminating the platform fee charged by traditional music platforms such as Spotify. Because of the value that creators bring to the network, Audius gives them network ownership. Brave leveraged its Basic Attention Token (BAT), which monetizes user attention to drive user growth and create value for advertisers, publishers and users in the ecosystem. 6 Market cap as of May 17, 2022, according to Coin Market Cap.
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 13 Among these, crypto exchanges are uniquely positioned to provide entry into the Web3 ecosystem, as well as to boost liquidity. Centralized exchanges can also take on the responsibility of providing infrastructure for crypto custody via exchange custodial wallets. As a result of the rapid rise of Web3 applications, smart contract-based tokens are gaining traction due to their ability to significantly disrupt Web2 value pools. For example, over 70% of the spot trading volume increase between 2020 and 2021 was driven by altcoins, and altcoins accounted for over a third of perpetual swap volume in 2022. (See Exhibit 11.) Trend 3: Emerging Markets Are Leading the Way in Crypto Adoption with a Significant Increase in Crypto Trading Volume in 2021 While the average individual crypto holding among crypto currency holders is lower in emerging countries, crypto penetration is already higher than in developed countries. (See Exhibit 12.) According to recent Statista survey data,7 crypto penetration in Nigeria is over 40% higher than traditional banking penetration in the country. For emerging markets with less mature financial infrastructure, crypto brings unique opportunities to provide traditional finance services. 7 https://www.statista.com/statistics/1202468/global-cryptocurrency-ownership/. Low-friction, user-centric entry point to connect to various applications and protocols Applications and interfaces for specific use-cases, usually implemented as a set of smart contracts Provide liquidity and exchange platforms/serve as gateway by providing infrastructure services (e.g., wallet) Interoperable building blocks that are highly reliable at doing one specific task; can be combined to create applications Underlying infrastructure, the foundation for trustless execution, settlement & dispute resolution Players non-exhaustive Access Application Exchange Enabler Blockchain Wallet/Browser Aggregators DeFi NFT GameFi SocialFi L1 chains & scaling solutions Cross-chain bridges Secure Identify Analyze Store Govern ENS Metamask Phantom Bitkeep Brave DappRadar Zapper Uniswap Compound Aave OpenSea LooksRare Axie Infinity Sandbox Mirror Audius Binance, Bitget, Coinbase, FTX, OKEX OpenZeppelin CERTIK Dune Analytics Nansen Arweave IPFS Snapsho Tally Ethereum Solana Avalanche Cosmos Synapse Anyswap Hop Discovery DeFi EXHIBIT 10 | Exchanges Uniquely Positioned to Provide Liquidity and Access to Web 3.0 Services
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 14 Top 20 coins by 24hr perpetual swap volume ($Bn, 2022/04/07) GMT NEAR LUNA BTC ETH SOL DOGE 3.0 WAVES ADA AVAX Other 48.4 1.4 47.8 8.7 6.0 4.3 3.0 2.4 1.5 17.6 Altcoin perpetual swap volume 1/3 of total perpetual swap volume Open Interest (USD Bn) Annualized Velocity1 13.9 13.8 0.5 0.3 1.0 0.8 0.3 0.4 0.5 0.4 1274 1253 6573 7687 1568 1364 4236 2239 1056 1321 Sources: Coinglass; BCG analysis. 1 Daily perpetual swap volume / open interest * 365. EXHIBIT 11 | Altcoins Account for Substantial Share of Perpetual Swap Volume 1 2 For emerging markets with less matured traditional financial infrastructure ( ), crypto have the opportunities to see more day-to-day use case (i.e., cross-border remittance, wealth mgmt. , payment network) compared to advanced economies with crypto adoption primarily driven by crypto as an alternative investment assets / technology innovations Crypto exchanges have the unique opportunity to tap into these use cases to enhance customer value propositions and acquire more customers to the platform 0 10 20 30 40 50 0 20 40 60 80 100 Philippines Kenya Mexico Argentina Peru Colombia Indonesia South Korea Turkey South Africa Morocco Brazil Chile Saudi Arabia Egypt India Russia United States Malaysia Traditional banking penetration (%) Netherlands Cryptocurrency penetration (%) Singapore Australia Nigeria Vietnam Thailand Crypto penetration – Banking penetration > 0% -40% < Crypto penetration – Banking penetration < 0% Emerging & Frontier markets Developed markets 1 2 Sources: Statista; Global Finance; MSCI; BCG analysis. EXHIBIT 12 | Emerging Markets Have Higher Crypto Penetration and Expect to Become Fertile Ground for Crypto Innovations
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 15 In our analysis, we have identified four emerging market crypto use cases, and provided examples of how crypto exchanges are tapping into these opportunities: • Crypto-backed wealth management. In countries such as Argentina and Turkey, which have seen significant currency devaluation, crypto currencies, and especially stablecoins, are an alternative store of value, and a way to gain exposure to US dollars. In emerging countries, crypto exchanges are also taking steps to create Defilading’s products, providing crypto-backed wealth management for unbanked individuals. In Argentina, local crypto exchange Buenbit offers interest on DAI, BTC and ETH by acting as a bridge to audited DeFi protocols such as Aave, Compound and Curve, where customers can earn up to 10% annualized interest. • Crypto cross-border remittance. Cross-border remittance flow is significant in emerging markets, but the current remittance process is long and expensive (on average 5–7% for emerging markets, and over 10% in some countries in LatAm, according to World Bank estimates). Mexican crypto exchange Bitso partnered with global fintech firm Circle to facilitate $1.2 billion of yearly remittance flows between the US and Mexico at reduced fees compared to traditional remittance services. • X-to-earn. The future of work coordinated by decentralized autonomous organizations (DAOs) will unlock new earning opportunities. These will be particularly attractive to emerging markets that struggled economically during the Covid pandemic. One prominent example of x-to-earn is play-to-earn and GameFi applications. Southeast Asia and LatAm have the largest user bases for popular play-to-earn game Axie Infinity, in which gamers can earn a living wage for playing games and earn in-game items. Another earning model is contribute-to-earn. RaidGuild is a DAO consisting of a diverse pool of software development talent focusing on Web3 development, where DAO members can earn income by providing functional expertise. In the future, DAO might offer a viable career path for some emerging market consumers, creating the chance to earn more money than is offered locally. • Crypto-backed payment. In emerging market ecommerce in countries such as Brazil and Mexico, crypto-backed payments are increasingly popular as a cheaper alternative to traditional payment infrastructures. Leading Mexican retailer Elektra recently announced it would accept Bitcoin payments through integration with Bitpay, a USbased crypto exchange/payment company. The payment option shows the FX rate and allows users to transfer funds via a QR code or crypto key. As a result of the rapid innovation and crypto adoption in emerging markets, we also see increased trading volume share. Spot trading volume in emerging markets (MEA, LatAm
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 16 and APAC) rose from 26% in January 2021 to 32% in December 2021. Derivatives volume share in the same region grew from 39% to 42% during the same period. 2.4 Centralized Crypto Trading: A Large Market Opportunity The increase in crypto adoption and macro trends contribute to the growth of the global crypto trading volume. The global centralized crypto trading volume was $54 trillion in 2021. Spot trading volume was $20.6 trillion, more than 2000 times 2016 volumes. Historically, spot trading volume strongly correlates with overall crypto market capitalization and volatility. In derivatives, annual trading volume is about $33.2 trillion, mostly in perpetual swaps offered on crypto-native trading platforms. (See Exhibit 13.) 20.59 29.44 Spot 2021 Spot 20161 Crypto Marketcap 2016 2.25 Crypto Marketcap 2021 Perpetual Swaps 2021 3.41 Futures 2021 0.39 Options 2021 ~54 Total 2021 0.02 0.01 ~135x ~2059x Metrics Trading value Notional trading value Other revenue stream • Listing fee • Staking & borrowing • Deposit & withdraw fee (only applicable to fiat exchanges) • Web3 (DeFi, GameFi, SocialFi) • … Global trading value of crypto products/services (As end of 2021, $Tn) Sources: Coinmarketcap.com; The Block; Token Insight; Messari; BCG analysis. Note: Perpetual swaps, future, options volume split based on Token Insight report. 1 Use Bitcoin spot volume as proxy. EXHIBIT 13 | Global Centralized Exchange Volume Reached ~$54Tn in 2021 Trading is a major source of revenue for crypto exchanges, which also generate revenue from token listing, staking and borrowing, fiat deposits and withdrawals, and Web3-related activities. Spot trading volume is primarily influenced by total crypto market cap and market volati- lity. Growth in market capitalization could be driven by two interrelated opportunities. First, crypto could grow as an asset class and a potential hedge against inflation, leading to price increases. According to Goldman Sachs, cryptocurrencies currently account for
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 17 roughly 20% of the global “store of value” market. According to some projections, Bitcoin may one day account for more than 50% of the global “store of value” market, resulting in a Bitcoin value of more than $100,000. The second primary use case is crypto as infrastructure for a variety of Web3 applications. We expect the growth of these assets to be stronger than that of Bitcoin because they are productive, with the ability to generate revenue/dividends beyond price appreciation. Another factor that influences spot trading volume is market volatility. As more institutional investors come into the crypto market, we expect volatility to fall. Crypto derivatives have more growth headroom than spot trading. We expect higher crypto derivative growth in emerging markets in LatAm and APAC, as well as in advanced eco- nomies, reflecting more advanced financial markets with mature regulatory environments regarding derivatives. (See Exhibit 14.) The overall crypto derivative-to-spot ratio is expected to get closer to those observed in traditional equity markets. 0.5 4.7 13.3 1.4 4 3 Equity Derivative Spot Eastern Europe & Central Asia APAC 0.1 Middle East North America Africa Central & South America Western Europe Overall 0.1 0.8 1.3 6.8 12.5 3.7 0.3 7.2 0.2 2.1 3.4 3.5 12.0 20.6 33.2 1.0 1.7 1.8 0.9 1 1.6 Crypto Derivative Spot Total equity trading value ($Tn, 2021) Total crypto trading value ($Tn, 2021) 4.2 (overall) 1.6 (overall) 1.3 1.8 66.6 126.5 17.0 214.6 316.0 23.4 509.1 51.3 Central & South America Middle East North America APAC Africa Eastern Europe & Central Asia Western Europe Overall 0.9 0.4 1.3 1.7 1.8 0.8 0.6 902.7 Spot Derivative Gap between crypto and traditional equity indicates growth potential, but this is contingent upon evolution of local regulations Sources: The Block; SimilarWeb; WFE; BCG analysis. Note: Equity trading value for US based exchanges which do not report trading value to WFE is estimated based on top contracts traded. EXHIBIT 14 | Future Growth Potential in Crypto Trading Indicated by Current Low Derivative to Spot Ratio Compared to Traditional Finance
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 18 We expect more product innovation within crypto derivatives, favoring futures and options rather than perpetual swaps. For example, cash-settled non-deliverable forwards (NDFs) may gain more traction from injections of institutional capital. NDFs may also provide use cases that are unique to crypto. For example, an investor with a portfolio of NFTs built on Ethereum blockchain may use NDFs to hedge the risk related to ether. The emergence of institutional investors has boosted demand for hedging and more sophisticated ways of generating yield. Options are more complex than futures and are still relatively niche. Currently only a few assets, including Bitcoin and Ether, are offered as underlyings. Over the next 12 months, we will see more organized players entering the centralized options market to support demand from a range of players. FTX’s acquisition of LedgerX in October last year marked the start of this trend. In addition, new option-based products are emerging. Options vaults, for example, enable players to stake assets that are then deployed to options strategies such as covered calls and cash-covered puts. The yield of the vaults is further enhanced by token rewards and investment in yield-bearing tokens. Once deemed accessible (by regulation), institutional investors may increasingly tap into these products, for example by selling short-dated options to collect volatility premiums.
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 19 3. Crypto Trading Hot Spots 3.1 Global Crypto Growth Region Trading Overview As discussed in the previous section, emerging markets and advanced APAC economies are particularly attractive for global exchange players due to strong crypto trading growth fueled by crypto adoption, high future crypto trading potential compared to traditional finance, and opportunities for crypto exchanges to expand services beyond trading to provide day-to-day use cases to local customers. Emerging markets and advanced APAC countries accounted for one third of global spot trading volumes and around 40% of global derivative trading volumes in 2021. (See Exhibit 15.) Source/ methodology: Global exchange volume from The Block, local exchanges from Coin Marketcap/nomics, then multiplied by the % web traffic from each country adjusted by average individual crypto holding in that region <1% <1% ~2% ~2% ~3% ~2% ~28% ~34% ~10% ~11% ~35% ~36% ~17% ~10% ~1% ~1% ~4% ~4% North America Latin America & the Caribbean Africa Middle East Southern Asia Northern Asia Oceania Western Europe Eastern Europe & Central Asia 2021 Spot 2021 Deriv. Sources: The Block; Coinmarketcap; Nomics; SimilarWeb; BCG analysis. Note: Emerging market includes LATAM, Africa, Middle East and Southern Asia; Advanced APAC economies include Northern Asia and Oceania. EXHIBIT 15 | Global Crypto Trading Landscape In spot markets, there are three archetypes, primarily driven by local regulations. • Local exchange dominates. In countries such as Thailand and the Philippines, it is typically difficult for offshore exchanges to obtain licenses to operate onshore. Regulated fiat exchanges account for a large share of the market. Global players are attempting to capture markets through alliances, acquisitions and joint ventures. For example, Binance attempted to re-enter Malaysia through a strategic investment in
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 20 MX global, one of the four regulated digital asset exchanges in the market, after suspending its services in 2021 due to the actions of local regulators. • Global exchange dominates. In countries with friendly exchange regulations or unclear regulations—such as Mexico, South Africa and Brazil—global exchanges are able to leverage scale and technology advantages to capture a larger share of the spot market. Global players typically adopt greenfield or acquisition strategies. • Global offshore exchange exclusive. In countries where crypto currency is banned or illegal, such as Egypt and Pakistan, only global offshore exchanges and peer-to-peer exchanges operate. Across these markets, global offshore exchanges dominate the derivatives trading market, because local players either do not have the capabilities to offer, or are not permitted to offer, derivative products, as derivatives are considered financial instruments in most onshore jurisdictions and are therefore subject to strict regulations. In the rest of this section, we will deep-dive into Latin America, Africa, the Middle East and APAC. We will evaluate market attractiveness through the lens of 1) Crypto trading market size, 2) Competitive landscape, 3) Market potential with a focus on derivatives, and 4) Regulatory environment, to identify the most attractive regions and countries into which global exchanges will most likely enter, or in which they will further expand their existing footprints. 3.2 Latin America Market size. LatAm crypto centralized exchange trading accounts for about 1% of global spot and derivative trading value. Brazil is the largest crypto market, with more sophisticated crypto users and a higher percentage of institutional investors; Argentina, Venezuela and Mexico also have significant trading volumes, driven by retail. Competition. Binance is the dominant global player in the region. Local players such as Bitso and Mercado Bitcoin have garnered significant investment, but currently focus exclusively on spot products. They have taken a significant share of their respective home regions. In Brazil, we see both a local fiat exchange and global offshore exchange in the spot market. (See Exhibit 16.) However, the local crypto derivative market is dominated by offshore players, reflecting technology capabilities. In due course, and as regulation allows, we expect global offshore players to move onshore. Binance has stopped offering crypto derivatives on the Brazilian version of its website due to regulatory pressure and is now in
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 21 the process of acquiring a local financial broker to offer derivatives. The local traditional exchange B3 is also seeking to enter the crypto derivative market. Market potential. Brazil has the highest crypto derivative potential in the region, given its equity-derivative-to-spot ratio of about 15 in traditional finance, and its current low crypto-derivative-to-spot ratio (<1). Regulation. Overall, LatAm has a friendly regulatory environment for crypto exchanges and spot trading. However, Brazil has stricter regulations on derivative trading. Binance was given a regulatory warning for offering derivative products. We also saw that Argentina recently took a hardline approach to crypto regulations, banning financial institutions from transacting or facilitating transactions with their clients in digital asset trading. 3.3 Africa Market size. Africa’s crypto centralized exchange trading accounts for less than 1% of global spot and derivative trading. However, the region has seen an increase in this area 9.8 1.1 0.9 0.5 0.4 0.3 1.3 Binance Mercado Bitcoin OKEx Others BitPreço FTX Bitfinex 2022 Q1 spot trading value by player 2022 Q1 derivative trading value by player 9.6 2.5 0.7 0.7 0.3 0.3 Huobi Binance Okex FTX Bitget Others Global player Local/Regional Player $Bn $Bn ~68% Share of spot trading value ~68% Share of deriv. trading value Sources: The Block; SimilarWeb; Chainalysis; Expert Interview; BCG analysis. EXHIBIT 16 | Binance Dominates Both Spot and Derivative Trading Where Local Players Present Only in Spot in Brazil
Boston Consulting Group, Bitget & Foresight Ventures July 2022 What Does the Future Hold for Crypto Exchanges? 22 in the past year. South Africa is the largest market, reflecting its more advanced financial infrastructure and fiat-to-crypto payment rail. Nigeria is the second largest market. South Africans primarily use crypto as an alternative investment, while Nigerians use it mainly for savings. Competition. In South Africa, local spot exchanges such as VALR and Luno are gaining market share by targeting retail users. These offer seamless fiat on-off ramps and an easy-to-navigate user experience. According to Chi Nnadi, CEO of the newly founded African local exchange MARA, “Many global exchanges cannot operate in the region due to regulatory challenges and difficulties in reaching the African consumer in an authentic way.”8 The derivative market is still dominated by global players. (See Exhibit 17.) Market potential. We expect strong growth in crypto adoption in Africa. However, derivatives may lag given their limited use in traditional markets. Regulation. South Africa has a progressive regulatory framework and is friendly toward global exchange players. Conversely, countries such as Algeria and Egypt have banned crypto, while others are developing regulatory frameworks. 8 Source : Cointelegraph — Backed by Coinbase and Alameda, African exchange MARA eyes continental prospects. 1.7 1.4 1.0 0.6 0.4 0.2 0.2 Others VALR Binance OVEX OKEx Luno FTX 1.7 1.0 0.7 0.2 0.2 0.2 0.1 0.0 Okex Deribit Binance FTX Huobi Others Bitmex Bybit Global player Local/Regional Player $Bn $Bn ~78% Share of spot trading value ~39% Share of deriv. trading value 2022 Q1 spot trading value by player 2022 Q1 derivative trading value by player Sources: The Block; SimilarWeb; Chainalysis; Expert Interview; BCG analysis. EXHIBIT 17 | Regional Players Take Majority Share in Spot, Global Players Dominates Derivatives in South Africa
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