Crypto market facing post-FTX wake-up call

investmentnews.com:

Market making in digital tokens used to be a font of outsized profitability. The picture today is very different as costs jump and investors avoid a crypto sector scarred by a $2 trillion rout.

The price crash led to bankruptcies like that of the FTX exchange, leaving a mountain of coins stranded on collapsed platforms and stoking fears of ongoing upheaval. Market makers have stepped up efforts to mitigate the risk of being ensnared by future turmoil, a shift they say erodes margins.

Liquidity providers Auros, GSR Markets Ltd. and Wintermute Trading Ltd. highlighted trends such as diversifying activity across more exchanges. They are also increasingly storing digital-asset inventories away from trading venues and using them as collateral to borrow tokens to deploy on crypto platforms. 

Collateral is kept at custodians or prime brokers and only the tokens obtained from lenders are exposed if an exchange fails. For the market-making sector as a whole, using intermediaries contributes to a 20%-30% drop in profitability compared with depositing and leveraging up coins directly with a trading site, Auros said.

“The FTX debacle was a wake-up call for the industry,” said Le Shi, head of trading at Auros. Risks stemming from leaving assets on exchanges weren’t always prioritized “but that’s changed and we understand higher cost is going to be a way of doing business now,” he said.

Using dedicated, off-exchange custody providers can inhibit the scope to leverage, while providers of depository services also levy fees, Shi added. He stressed that the exact impact on margins varies greatly by company.

The business of enabling crypto trades and profiting from the difference between buying and selling prices showered cash on market