The European Securities and Markets Authority (ESMA) issued a warning about the high level of concentration in the crypto markets on April 10. This concentration is concerning because the failure of a single asset or exchange could have a widespread impact on the entire crypto ecosystem. ESMA’s research found that market capitalizations and trading volumes are heavily concentrated in a small number of assets within the crypto market.
In December 2023, Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) accounted for a staggering 74% of the crypto market capitalization. These assets also made up more than half of the annual trading volume in 2023. When it comes to exchanges, just 10 platforms were responsible for handling 90% of the trading volume. Binance, in particular, held a significant share of the trading volume, although its dominance has seen a gradual decline since December 2022.
ESMA highlighted the high level of interconnectedness among individual cryptocurrencies, as well as the strong price correlations between them. The agency also noted a positive correlation between the crypto market and equities, indicating a certain level of risk. Additionally, the lack of a stable relationship with gold raises concerns about the role of crypto as a “safe haven” asset.
The findings of ESMA’s research have significant implications for the regulatory activities in the European Union. Despite the adoption of the Markets in Crypto-Assets (MiCA) regulation in June 2023, a large majority of crypto transactions involving fiat currencies still revolve around the US dollar and the South Korean won. The euro, on the other hand, plays a minimal role in these transactions.
ESMA also highlighted concerns regarding the location of crypto exchanges. While a significant portion of transactions occur on exchanges with an EU Virtual Asset Service Provider (VASP) license, many of these transactions actually take place outside of the EU, particularly in tax havens. The lack of transparency and the concentration of trading in these tax havens pose risks to the overall stability of the market.
ESMA’s warning about the high concentration in the crypto markets underscores the need for increased diversification and risk management strategies. Regulatory efforts such as the MiCA rules aim to address some of these concerns, but continued monitoring and oversight are necessary to ensure the long-term stability of the crypto market.