The European Securities and Markets Authority (ESMA) issued a warning about the high level of concentration in crypto markets on April 10. According to ESMA, this concentration poses a significant risk, as the failure of a single asset or exchange could have far-reaching implications for the entire crypto ecosystem. The agency’s research revealed that market capitalizations and trading volumes are heavily centralized in a small number of assets within the crypto market.
Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) were identified as the top players in the crypto space, collectively accounting for 74% of the market cap in December 2023. Additionally, these three assets made up more than half of the annual trading volume for 2023. The dominance of these assets highlights the lack of diversity within the crypto market, leaving it vulnerable to volatility and potential disruptions.
ESMA’s findings also pointed to a concentration of trading volumes on a select number of exchanges. Just 10 platforms were responsible for handling 90% of the trading activity, with Binance leading the pack by accounting for approximately 40% of the total volume by December 2023. The agency noted that the dominance of certain exchanges raises concerns about market manipulation and the overall stability of the crypto ecosystem.
ESMA highlighted the strong interconnectedness of individual cryptocurrencies, showing a high degree of correlation in price movements. This interconnectedness poses a systemic risk, as a downturn in one asset could trigger a domino effect across the entire market. Furthermore, the agency identified a positive correlation between crypto and equities, indicating an increased level of risk and a lack of a stable relationship with traditional safe-haven assets like gold.
The concentration of crypto transactions involving fiat currencies raised specific concerns for the EU’s regulatory activities. Despite the adoption of the Markets in Crypto-Assets (MiCA) regulation in June 2023, the euro has played a minor role in fiat-crypto transactions, accounting for only about 10% of the total volume. ESMA believes that the implementation of MiCA rules could stimulate growth and improve transparency within the market, addressing some of the existing concerns related to location and regulatory oversight.
The warnings issued by ESMA highlight the significant risks associated with concentration in the crypto market. The dominance of a few key assets and exchanges, coupled with the interconnectedness of cryptocurrencies, create vulnerabilities that could undermine the stability and integrity of the entire ecosystem. Regulatory bodies, including the EU, will need to address these challenges through proactive measures to enhance market transparency and mitigate systemic risks.
