Morningstar - Q3 2022 - 37

gCentralized exchanges that exclusively or
primarily trade in cryptocurrencies, such as
Coinbase COIN and Crypto.com.
gIncumbent retail brokerage platforms like
Robinhood HOOD.
gPayments applications like PayPal PYPL
and Block SQ.
Unlike traditional stock exchanges, these
companies often fulfill multiple roles in the
cryptocurrency trading ecosystem by acting as an
exchange, asset custodian, and broker.
Recently, a new breed of exchanges has
entered the mix-decentralized exchanges
that, unlike traditional exchanges, have no
intermediary. Within the plumbing of
a decentralized exchange, a series of executable
smart contracts on a blockchain algorithmically
links buyers and sellers, setting pricing
for people who choose to exchange on the
protocol. Unlike all other types of cryptocurrency
exchanges, decentralized exchanges
by design cannot denominate trades in fiat
currencies-instead, all participants must
buy and sell in cryptocurrency.
Despite their differences, cryptocurrency
trading platforms all have one thing in common-
high transaction fees. Unlike stocks or ETFs,
which most brokerages will allow customers
to buy and sell for free, cryptocurrencies
still require a premium to trade. In part, that's
a consequence of the design-any time
a cryptocurrency changes hands, its blockchain
must be updated to reflect the transaction,
which can require a significant amount
of energy to log. Due diligence for coin listings
on an exchange also presents a hurdle.
Robinhood, the sole provider that offers free
cryptocurrency transactions, lists only
11 available for trading. Finally, while the
cryptocurrency market has grown at a stunning
pace over the past 15 years since its invention,
its $1.4 trillion market capitalization is still
a drop in the bucket compared with the global
stock market's more than $100 trillion market
capitalization. Smaller markets transact
less frequently and carry less liquidity, which can
widen bid-ask spreads and support higher
transaction costs.
All these factors exert tremendous pressure
on the pricing structure of cryptocurrency trades.
Per-transaction fees can range from free to
upwards of 6% depending on the conditions
surrounding the trade. In EXHIBIT 3 , we compiled a
list of common exchange types, prominent
members within those groups, the variety of coins
available to transact, and costs of execution.
For this illustration, we used a sample purchase of
$500 worth of ether, executed in either U.S.
dollars or USDT, a popular stablecoin that tracks
the value of the dollar on decentralized exchanges
where fiat currency-denominated transactions
are unavailable. The table illustrates that for
investors accustomed to the frictionless trading of
stocks and ETFs, there are no good choices. Among
the options, Binance has proved most palatable
to investors, despite increasing regulatory pressure,
because it charges relatively low fees to buy
and sell cryptocurrencies and offers a wide
variety of crypto to trade. Binance facilitated 51%
of the total spot transactions and 58% of
derivatives transactions executed in May 2022,
according to CryptoCompare.
MVIS CryptoCompare DA 100 PR USD
DJ Commodity Crude Oil TR USD
Choosing an exchange entails trade-offs between
depth and cost. Retail brokerages may have few
coins available to investors, but they charge
0.58% on average compared with the crypto-native
12/2015
EXHIBIT 4
Boom-and-Bust Narratives Sometimes, all it takes is a tweet to send the price
of a coin skyward.
Price of Dogecoin
$0.40
0.30
Elon Musk tweets
about dogecoin.
0.087
12/2014
12/2016
Source: PitchBook, Morningstar. Data as of 05/31/2022.
12/2018
12/2020 05/2022
0.20
0.10
12/2017
exchanges' average fees of 0.70%. Those
lower prices may come with a catch, though-
Robinhood, for example, doesn't allow users to
migrate their cryptocurrency purchases
into a wallet. Payments companies, which often
hire a third party to process cryptocurrency
transactions, have the most unfavorable
pricing structure relative to the amount of choice
they provide.
MSCI ACWI NR USD
DJ Commodity Gold TR USD
Still, even those fees are modest compared
with the highly variable " gas " fees that
ethereum network users pay to use decentralized
exchanges like Uniswap. Gas fees pass the
costs of mining a cryptocurrency to users
of the platform by tacking a fee on to each
transaction. As platforms like Uniswap proliferate,
developers have focused on building scaling
solutions to lower the fees charged to
users, and ethereum plans to resolve some of the
headaches by switching to a proof-of-stake
blockchain in 2022.
Where Are Digital Assets Headed?
With astonishing levels of uncertainty and
a broadening audience, it's only natural to ask
where crypto goes from here. We believe
two main factors will dictate the growth of the
cryptocurrency market: whether consumers
67.3
35.9
13.6
12.3
12/2019
05/2022
Standard Deviation
200%
150
100
50
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37
https://www.morningstar.com/stocks/xnas/coin/quote http://www.Crypto.com https://www.morningstar.com/stocks/xnas/hood/quote https://www.morningstar.com/stocks/xnas/pypl/quote https://www.morningstar.com/stocks/xnys/sq/quote http://www.morningstar.com/products/magazine
Morningstar - Q3 2022

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