Markets
Europe’s Flourishing Admiration for Crypto
Payal Shah, CME Group
In one look :
- Europe is the second largest cryptocurrency economy in the world, accounting for 17.6% of global trading volume.
- The launch of micro euro-denominated Bitcoin and Ether futures aims to accelerate the institutionalization of the European crypto market.
European investors have become a leading force in the crypto world, and their fervor is expected to continue this year and beyond.
Central, Northern and Western Europe (CNWE) is the second largest cryptocurrency economy in the world, behind North America. The region accounted for 17.6% of global trading volume between July 2022 and June 2023, according to Chainalysis’s 2023 Cryptocurrency Geography Report.
Four major factors explain the adoption of cryptocurrencies by Europeans:
1. Stops in other regions
With crypto crackdowns in Asia, digital asset drama in 2022, and continued regulatory sanctions in the United States, European cryptocurrency markets have benefited from less intensive regulatory scrutiny.
The Euro is the second most traded fiat currency for spot crypto transactions after the United States Dollar (USD), with increasing liquidity. The trading volume in Europe is mainly due to the decline of trading activities in Asia, where countries like China have banned cryptocurrency trading and mining. There is also considerable activity in the area of decentralized finance (DeFi) from Europe, familiarizing European markets with the notion of disintermediated financial transactions.
Growth is also driven by institutional flows. Year-to-date, 24% of CME Group’s Bitcoin and Ether futures volume has been traded from EMEA.
Given the recent volatility in Euro foreign exchange markets and the recent USD/EUR parity, access to BTCUSD-based spot markets is more expensive for Euro-funded or Euro-income-based investors.
2. Liquidity at the heart of investments
For an asset to be invested by institutions, it must have sufficient liquidity. European institutions have access to exchanges that offer a wider range of crypto ETFs, exchange traded notes (ETNs), funds, derivatives, perpetual contracts and a growing range of platforms on which to trade. transactions.
Reliable on-ramps have improved significantly in recent years, as a handful of European exchanges have raised large funding rounds and global exchanges have expanded their European presence.
3. Yield through decentralized finance (DeFi)
Across the region, DeFi is the most popular service category, accounting for 54.8% of the value of cryptocurrencies received. DeFi has played a key role in CNWE’s crypto adoption over the past few years, notably with decentralized exchanges (DEX).
Why are European investors betting on DeFi? The answer can be summed up in two words that characterize the European banking landscape: efficiency and technology.
European institutions are accustomed to receiving interest on their bank deposits and generally view an account offering a rate above inflation as an attractive investment option. However, with interest rates near zero or even dipping into negative territory in recent years, institutions have been forced to look elsewhere for yield. There is growing recognition that return should be sought in technology companies, with DeFi platforms emerging as alternative avenues.
This evolving dynamic brings crypto assets closer to integration with traditional financial systems, opening new avenues of yield generation for investors and entrepreneurs. Recent performance of crypto markets, coupled with in-depth analysis of investment trends, highlights strong demand for such assets. The resulting wave of innovation meets this demand and could ultimately benefit market participants of all types.
4. Technological advances
European financial institutions are keen adopters of technical advancements, a trend that stems from their long-standing emphasis on IT infrastructure, surpassing that of U.S. banks. This trend is driven by the need to remain competitive with their American counterparts.
Innovation has played a central role in the recent expansion of the banking sector, so much so that many Europeans can’t remember the last time they used a paper check.
Therefore, financial institutions are starting to view decentralized finance not as a threat but as a promising opportunity. Several leading exchanges are already preparing for the convergence of traditional and crypto asset trading. Many banks are exploring centralized and decentralized blockchain-based applications and intend to offer cryptocurrency trading, a process that is likely to accelerate as their institutional clients become more active in the space.
Regional risk management
As growth in the Eurozone continues at a sustained pace, the importance of regionalized risk management tools will become more important.
The Euro-denominated and Euro-margined Micro Bitcoin Euro and Micro Ether Euro futures contracts provide market participants with additional tools to hedge exposure to bitcoin and ether – the two largest cryptocurrencies in terms of market capitalization.