One of the industry trends written about here briefly a couple of weeks ago is the move towards more companies setting up ‘prop shop’ type operations. In reality these are more a combination of two things.
- Trading contests that you pay to enter
- Actual prop shops where people trade a company’s money
The Trading Pit, a relatively new company backed by Tickmill’s founders, is an example of this.
To discuss this part of the industry, I spoke to Jonathan Baumgart, the CEO of Atomiq Consulting. Jonathan was previously at FXCM and Boston Technologies, before setting up his consulting firm almost a decade ago.
In the podcast we look at…
- The differences between ‘old’ prop shops and ‘new’ prop shops
- How brokers make money from this business model
- What you need from a regulatory point of view
- What tech you need to get started
- How you market the service
You can listen on Apple Podcasts or Spotify below.
No more crypto
In April of this year, bitcoin dork Sam Bankman-Fried (Scam Bankrupt-Fraud) was on a Bloomberg podcast discussing the crypto industry. At one point in the interview he was asked to explain the mechanisms behind yield farming, a way of generating interest from crypto holdings.
It is worth reading the whole explanation or listening to it but, in short, he says (I am not making this up) that yield farming is kind of like putting money into a box and because the value of the tokens in that box increase as more people put money into it, more people put money into it, which drives up the value further.
This is a description of a ponzi scheme. You can talk about defi or blockchain or whatever other random crypto stuff you want, this is a ponzi scheme. Bankrupt-Fraud even says in the interview that…
- There is a lot of validity to the claim it’s a ponzi scheme
- In theory the tokens in the box should be worth nothing
I remember listening to this when it came out and thinking it would cause a market crash. Nothing happened. Imagine if the CEO of one of the largest investment banks in the world gave an interview where he said it was valid to claim that their business activity was a ponzi scheme and that most of the assets they trade in have no value. At a minimum their share price would collapse. But hey, that’s just crypto.
I’ve said here a couple of times before that I think crypto is going to zero. As always, I’m happy to accept that I could be wrong. Whether or not it will eventually happen is probably an article for another outlet. But let’s continue on the assumption that it is going to zero – what would that mean for the FX/CFD world?
One is the obvious loss in revenue that some companies would experience. Annoyingly, it is no longer easy to see how companies in the industry earn their money on an asset class basis. eToro has removed all of its old financials from its website, presumably because it’s no longer going public. Listed companies have also ceased to state how much money they earn from OTC derivatives on an asset class basis.
Nonetheless, we can see that in 2017, crypto trading was making up close to 70% of revenues at eToro. That narrowed to 16% in 2020 but probably increased substantially again in 2021. If you take the four financial years 2017 – 2020 as a whole, more than a third of eToro’s revenue was derived from crypto products.
In contrast, IG’s results from its 2020 financial year, the last time I can find a breakdown of earnings by asset class, show it derived 3% of its revenue from crypto. The year before that it was only 2%. That may not be a huge proportion of total revenue but it was still more than £12m in real money terms.
What’s interesting about this is that the decline for IG may have been partly due to the ban on crypto derivatives that the FCA put into play in late 2020. Again, if we assume that crypto is going to zero, this was a smart move by the regulator and one that could actually help protect the reputation of the CFD businesses over the long-run. This is a sector that is already under a massive amount of scrutiny. If it was dealing in derivatives on an asset class that is ultimately going to be worth nothing, that would hardly help the industry’s cause.
That leads us to another factor, namely branding and reputation. Some companies have staked a huge amount of their brand on the crypto sector, with eToro probably being the most notable example.
Over the past few years I think this has helped them. Branching out into crypto meant that they could brand themselves more as a tech-type company, rather than just a regular CFD / take a punt on the market broker. Now it may be the opposite. If you’ve spent years shilling for a product that leaves its investors broke, they aren’t going to be happy with you and it may be tougher to build trust with future customers.
Beyond financials and reputation are some other core components of a broker’s operations. Adding ‘physical’ crypto has, like adding cash equities, been a good way of getting around certain marketing restrictions. Crypto ads did not have to include the standard “X% of customers lose money” warning, for example.
It also broadened your marketing remit, as you could go after crypto traders and then cross sell them other products. I have no idea what the CACs were like for crypto, but if they were lower then that was definitely an added bonus. All of this will be gone.
Then there is the issue of payments. This probably applies less to the more ‘upscale’ companies in the industry today but there are businesses making lots of money that are operating purely with crypto payments.
Not only will these companies not be able to take crypto payments any longer, I actually wonder how easy it will be for them to take any payments at all. There are some brokers in St Vincent and the Grenadines, for example, that only take crypto as a form of payment. It will be difficult for them to find alternative solutions, although I don’t doubt there are some out there and that the people offering them are going to be very happy if crypto crashes.
Finally there is a question of what brokers can shill instead of crypto. Perhaps it’s time to make forex great again? Whatever the case, this is something brokers are going to have to prepare for. Crypto was supposed to be a solution to the problems which the financial crisis of the late 2000s exposed. Ironically it only exists because of the response to that crisis.
Low interest rates led to speculative investment and a hunt for yield. The former fuelled investment in crypto companies, the latter drove people to up their risk tolerance and buy ponzi coins in the hope they’d get rich quick or just see a better return than cash left in the bank. Now it’s all coming to an end and, although it’s been fun at times, will you be really sorry to see all those shitcoins getting flushed away?