As more and more institutional firms enter the world of cryptocurrencies, the crypto sphere is increasingly taking on attributes found in the traditional FX marketplace. This growing institutional participation is driving considerable growth in over-the-counter (OTC) trading and, by extension, OTC derivatives.
While centralised exchanges continue to dominate crypto trading in the spot and derivatives arenas, many institutions are turning to bilateral relationships to meet their crypto trading needs. “The products on those exchanges don’t necessarily offer the tailored exposure institutions are looking for,” explains Johannes Woolard, head of options trading, Europe, at crypto liquidity provider B2C2. “They’re much more geared towards retail-type flows, and the market impact of trading on exchange is huge. Many crypto exchanges are excellent, but they present a number of issues for counterparties. Offshore exchanges are a potential concern from a credit perspective and unregulated exchanges pose difficulties for certain trading activities.
“By trading with B2C2 on an OTC basis – similar to how FX is traded with a bank – everything is settled bilaterally. This tackles many of the credit problems for our professional clients as well as compliance concerns. Importantly, we can do this with very little market impact because we’re internalising that flow and not pushing it onto exchanges – something of huge concern to hedge funds.”
Woolard believes nearly every medium-to-large hedge fund worldwide now has, or is in the process of setting up, a crypto trading desk – unless they are conducting high-frequency trading activities – and that they are largely trading OTC. As the first single-dealer platform in crypto, B2C2 is now one of – if not the – largest liquidity providers in this fast-evolving market. The company, which was voted Best liquidity provider for crypto derivatives at the 2022 FX Markets e-FX awards, does have a presence on many exchanges, but the bulk of its flow is OTC.
This has led to a tripling of its derivatives volumes over the past 12 months, particularly after B2C2 introduced options and non-deliverable forwards in the latter part of 2021. For institutional participants, there is a significant benefit in trading a variety of products with the same counterparty since it reduces their cost of capital and credit risk by allowing them to hedge the underlying cryptocurrency risk and derivatives risk with a single entity. Furthermore, the bespoke strikes and maturity dates offered by B2C2 provide significantly more flexibility than that available on-exchange.
At its core, B2C2 is a liquidity provider across market conditions, relied on by agency OTC desks, aggregators, banks, exchanges, family offices, FX brokers and hedge funds for 24/7 access to the crypto market. At times of market dislocation, B2C2 is one of the few firms able to continually price, execute and settle trades.
Additionally, the firm’s innovative, tailored product offering is akin to what you would find at a tier one investment bank.
“We call ourselves a liquidity provider but, in truth, we’re increasingly more than that,” says Woolard. “There’s a real lack of end-to-end institutional-grade services in the cryptocurrency markets. There are many exchanges, so it’s very easy to trade. The technology is well developed and the user experience is good but, as there are no – or only very limited – treasury services or funding on offer, the cost of capital and operational overhead is extremely high.”
To address this gap, B2C2 began to build out its funding and derivatives offering more than a year ago, complementing its significant spot trading franchise. “On the one side, we provide execution services to the more alpha-focused traders such as hedge funds. On the other side, we provide a foundational service to firms such as crypto miners, corporates and wealth managers – who have a genuine need to hedge exposures and cashflows, or to structure more complex products for their own use or for their respective clients,” Woolard explains.
“So miners have a trading desk that trades with us, but they also have a treasury desk that faces our funding desk, which they use to borrow dollars in order to pay their bills.”
B2C2 was voted Best liquidity provider for crypto derivatives at the 2022 FX Markets e-FX Awards.
B2C2 is a digital asset pioneer building the ecosystem of the future.
The firm has unlocked institutional access to crypto by providing reliable liquidity across market conditions. B2C2’s success is built on crypto native technology and continuous product innovation, making it the partner of choice for diverse institutions globally.
Founded in 2015 and majority owned by Japanese financial group, SBI, B2C2 Ltd is headquartered in the UK, with offices in the US and Japan. B2C2 Ltd is registered in England and Wales under company number 07995888 with its registered office at 86-90 Paul Street, London, EC2A 4NE. B2C2 Ltd is the parent company of the B2C2 group of companies. Products may be provided by different members of the B2C2 group of companies, depending on the jurisdiction of the client and the regulatory status of the product and/or B2C2 group member. B2C2 is a registered trademark.