Just a few short months ago a Forex Broker assuming risk on Cryptocurrencies would have been unthinkable. The rapid rise of Bitcoin and other cryptos was great for brokers from a marketing perspective but a serious challenge concerning risk management.
Cryptocurrencies in a Trading Range
Since many Cryptocurrencies have now settled in a trading range, Forex Brokers have decided that it is a good time to assume more risk on Cryptocurrencies. While this might mean more substantial profits for these brokers in the short run, it could lead to more significant problems later on.
A Different Kind of Liquidity Source
Unlike Forex Liquidity Providers which are typically Tier One Banks Cryptocurrency Liquidity can be sourced from specialized funds or larger brokers which have established risk controls and capital in place. In Forex a liquidity relationship between a broker and a bank. The broker must be transparent about the volume and the nature of the business they will pass through. There is an unwritten rule that any toxic flow the broker introduces must be disclosed to the bank so that they can take appropriate risk measures. With Cryptos there are no such rules.
An Immature Market
Another concern with cryptocurrencies is that the market is only a few years old and the majority of forex brokers entered less than a year ago. The same inexperience applies to the Cryptocurrency Liquidity Providers. In the Forex Market, both banks and brokers have learned from events like the “Black Swan Event” of 2015 which left many brokers in ruins. One would hate to imagine overleverage and exposed brokers dealing with a similar event in the crypto world.
Forex regulators need to step in and establish some common-sense guidelines with regards to cryptocurrencies. Leverage limits and risk management guidelines can go a long way from averting a disaster from happening to forex brokers offering cryptocurrencies.