The European Securities and Markets Authority (ESMA) has warned that the cryptocurrency market will become highly concentrated on April 10th.
ESMA said concentration is a concern as failure of a single asset or exchange can have far-reaching implications for the cryptocurrency ecosystem.
According to the agency's findings, market capitalization and trading volume are “significantly concentrated” in a small number of assets across the cryptocurrency market.
Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) accounted for 74% of the crypto market capitalization in December 2023 and accounted for more than half of the annual trading volume in 2023.
Exchanges also saw a high concentration of trading volumes, with just 10 platforms processing 90% of trades. Binance alone used to account for about half of all trading volume, but its dominance has declined to 40% by December 2023, and has been steadily declining overall since December 2022.
ESMA warned that individual cryptocurrencies are highly interconnected and exhibit strong price correlations with each other. Furthermore, we explained that there is a positive correlation between cryptocurrencies and stocks, indicating the lack of a stable relationship with gold in addition to the risks.
The agency said that in light of its analysis, it does not consider virtual currencies to be an effective “safe haven.”
EU perspective
Certain findings are particularly relevant to EU regulatory activities. Of the 20-30% of cryptocurrency transactions involving fiat currencies, 80% involved the US dollar or Korean won. The euro played a “minor role”, accounting for about 10% of fiat transactions.
Even after the EU introduced the Market in Cryptocurrency (MiCA) Regulation in June 2023, the euro's involvement in fiat-cryptocurrency transactions did not increase. However, ESMA said the MiCA rules could be a “potential growth driver” if they come into force this year.
The location of the exchange is another matter. While 55% of the trades occurred on exchanges with EU Virtual Asset Service Provider (VASP) licenses, many similar trades occurred outside the EU. Approximately half of the trading volume of cryptocurrencies takes place on exchanges based in tax havens, with almost no trading volume on exchanges based in Europe.
ESMA said MiCA will address location-related issues through disclosure requirements and improve transparency as crypto exchanges expand into new jurisdictions.
The agency said its research broadly “supports implementation” of MiCA.
