Markets
Europe’s Growing Admiration for Crypto
Payal Shah, CME Group
At a glance:
- Europe is the second largest cryptocurrency economy in the world, accounting for 17.6% of global transaction volume
- The launch of Micro Euro-denominated Bitcoin and Ether futures contracts aims to accelerate the institutionalization of the European crypto market
European investors have become a leading force in the crypto world, and their fervor is expected to keep pace this year and beyond.
Central, Northern and Western Europe (CNWE) is the second largest cryptocurrency economy in the world, behind North America. The region accounted for 17.6% of global transaction volume between July 2022 and June 2023, according to Chainalysis’ 2023 Cryptocurrency Geography Report.
There are four main factors behind Europeans’ adoption of crypto:
1. Shutdowns in other regions
With cryptocurrency crackdowns in Asia, the digital asset drama of 2022, and ongoing regulatory sanctions in the US, European crypto markets have benefited from less intensive regulatory scrutiny.
The euro is the second most traded fiat currency for spot crypto transactions after the US dollar (USD), with increasing liquidity. Transaction volume in Europe was mainly driven by the decline in trading activity in Asia, where countries such as China have banned cryptocurrency trading and mining. There is also a huge amount of activity in decentralized finance (DeFi) coming out of Europe, familiarizing European markets with the notion of disintermediated financial transactions.
Growth is also driven by institutional flows. Year to date, 24% of Bitcoin and Ether futures volume on CME Group has been traded in the EMEA region.
Given the recent volatility in the euro forex markets and the recent USD/EUR parity, access to BTCUSD-based spot markets is more expensive for investors funded in euros or with euro income.
2. Liquidity at the heart of investments
For an asset to be invested in by institutions, it needs to have sufficient liquidity. European institutions have access to exchanges that offer a wider range of crypto ETFs, exchange-traded notes (ETN), funds, derivatives, perpetual contracts and a growing set of platforms to transact on.
Reliable on-ramps have improved notably over the past few years, as a handful of European exchanges have raised significant funding rounds and global exchanges have expanded their European presence.
3. Income through decentralized finance (DeFi)
Across the region, DeFi is the most popular service category, accounting for 54.8% of cryptocurrency value received. DeFi has played a key role in CNWE’s adoption of crypto in recent years, particularly with decentralized exchanges (DEXes).
Why are European investors betting on DeFi? The answer can be summarized in two words that characterize the European banking landscape: performance and technology.
European institutions are used to receiving interest payments on their bank deposits and typically consider an account that offers a rate above inflation to be a valuable investment option. However, with interest rates hovering close to zero or even dipping into negative territory in recent years, institutions have been forced to look elsewhere for income. There is growing recognition that yield should be sought in technology ventures, with DeFi platforms emerging as alternative paths.
This evolving dynamic is bringing crypto assets closer to integration with traditional financial systems, opening new avenues for generating income for both investors and entrepreneurs. The recent performance of crypto markets, coupled with in-depth analysis of investment trends, underlines robust demand for such assets. The resulting wave of innovation meets this demand and could end up benefiting all types of market participants.
4. Technological advances
European financial institutions are eager adopters of technical advances, a trend that stems from their historical emphasis on IT infrastructure, surpassing that of North American banks. This inclination was driven by the need to remain competitive compared to their US counterparts.
Innovation has been key to driving the recent expansion of the banking sector, to the point that many Europeans can’t remember the last time they used a paper check.
Consequently, financial institutions are beginning to view decentralized finance not as a threat but as a promising opportunity. Several prominent exchanges are already preparing for the convergence of traditional and crypto asset trading. Many banks are pursuing blockchain-based centralized and decentralized applications and have intentions of offering cryptocurrency trading, a process that will likely accelerate as their institutional clients become more active in the field.
Regional Risk Management
As growth in the eurozone continues apace, the importance of regionalized risk management tools will become more prevalent.
Euro-denominated, euro-margined Micro Bitcoin Euro and Micro Ether Euro futures contracts provide market participants with additional tools to hedge exposure to bitcoin and ether – the two largest cryptocurrencies by market capitalization.