East Vs West: The Battle for Crypto Market Dominance

It was a successful year for digital currency markets as excess fiscal and monetary expansion in response to the COVID-19 pandemic coupled with continued innovation within crypto asset technology has caused the total market capitalization for the cryptocurrency market to swell to over $700 billion as the digital asset market increased its market capitalization 273% year to date (YTD). Yet, despite favorable macro and microeconomic conditions uplifting the digital currency market as a whole, the never-ending fight for not just global economic dominance, but digital currency market dominance continues to persist between the “West”, North American and Europe, and the “East”, East Asia. Whichever overtakes the controlling interest in market share of the developing market will most likely supplant itself as the leader of the new financial ecosystem. So, who is currently winning the battle for Crypto Market Dominance?

Bitcoin Mining

East Asia continues to dominate the bitcoin mining space as China accounts for 65.08% of the average monthly share of total hash-rate. East Asia’s share of the mining hash-rate is approximately 9x greater than the United States’ share of 7.24%, which accounts for the second largest monthly share of the total hash-rate (University of Cambridge).

China’s inexpensive electricity generation, labor and manufacturing capabilities creates the ideal environment for mining firms to house their operations. (Buy Bitcoin WorldWide).

Crypto Exchanges

When it comes to exchanging digital assets, East Asia is at the forefront. Of the top 10 cryptocurrency exchanges by adjusted volume, East Asian exchanges makeup 89% or $31.28 billion of the aggregated $35.13 billion worth of cryptocurrency volume. The top 3 East Asian exchanges Binance, Huobi Global (now located in Seychelles, but maintaining a dominant presence throughout East Asia) and OKEx account for 76% of the aggregated volume among the top 10 exchanges. Meanwhile, the bottom 3 exchanges by volume within the same group; Coinbase Pro, CME and Kraken make up only 5.8% of the total aggregated volume (FTX Volume Monitor). Strict US regulations preventing some US cryptocurrency exchanges from offering users derivatives trading in conjunction with the more expansive adoption of the cryptocurrency ecosystem in Asia are contributing factors in East Asia’s cryptocurrency exchange volume dominance.

Institutional Investing

Although the East maintains dominance in both the bitcoin mining space and the cryptocurrency exchange volumes, the West dominates the institutional digital asset landscape. Two-thirds of cryptocurrency hedge funds are located in the United States and United Kingdom, while less than 10% of crypto hedge funds are located in Asia (PWC Hedge Fund Report). In addition, the United States is home to the largest crypto asset manager in the world, Grayscale, which currently has over $10.4 billion in assets under management (AUM). New smaller asset managers have also gained entrance into North America and Europe. 3IQ, Canada’s largest digital currency asset manager, now manages nearly $400 million worth of crypto (3iQ), while Swiss crypto ETP issuer, 21 Shares, has accumulated approximately $150 million in AUM (ETF Express).

Crypto 2.0

The DeFi market, which has grown 22x in 2020 from $600 million in total value locked (TVL) to $15 billion in TVL, has largely been led by the West. 14 out of the top 20 DeFi platforms by TVL have been built by teams located in either the United States or Western Europe and combined, have an aggregated TVL of $10.68 billion. This equates to 88% of the aggregated TVL among the top 20 DeFi platforms. However, there are only three DeFi projects, within the same cohort built by developer teams based in East Asia, accounting for only 3.8% ($468 million) of the aggregated TVL among the top 20. (DeFi Pulse).

Value Transfer

In terms of value transfer, the East and West are tied. East Asia makes up 31% ($215 billion) of all cryptocurrency activity sent and received, while North America and Western Europe combined accounts for 32% or ($228 billion) of all cryptocurrencies sent and received (Chainanalysis). Tether’s US dollar stablecoin, USDT, plays a unique role in cryptocurrency value transfer as it serves as the world’s reserve digital currency. Registering $46 billion in daily volume (Coinmarketcap), the most out of any cryptocurrency, USDT makes up 93% of all stablecoin value transferred in East Asia and 33% of all value transferred on-chain in East Asia. China’s ban on direct exchanges of Yuan for digital currency has allowed the US dollar’s presence to flourish in the East (Chainanalysis)

Regulations

Neither the East nor the West has complete stranglehold over the digital currency landscape. Both are successful in their own niches as the East currently controls the bitcoin mining space, while also being the leader in the cryptocurrency exchange sector. Meanwhile, although strict regulations make it difficult for US cryptocurrency exchanges to compete with East Asian cryptocurrency exchanges, regulations have actually helped the West build out their own digital asset infrastructure. The West has become the leader in the institutional investment space as institutional capital has a predilection for the “predictability” that a regulated market offers. This aids the continued growth of the institutional investment space as the West begins to outpace the East in terms of capital inflows for the first time ever. It is estimated that 1.6 million of bitcoin is making its way into US exchanges, while Asian exchanges are seeing only 1.4 million of bitcoin enter into its exchanges (Live Bitcoin News). South Korea, which once accounted for 25% of the world’s cryptocurrency transactions, is now seeing its growth being hindered by strict regulations which have been put in place to prevent inflows into masqueraded Chinese based exchanges (Reuters). As previously stated, strict regulations in China, which renders Yuan to crypto exchanges illegal, is actually allowing the US dollar (“USDT”) to prosper in the East.

Looking Ahead

If the current trend of institutional capital flowing into the West continues while the DeFi space continues its unprecedented growth, the West could actually outpace the East in digital asset innovation. However, USDT acting as the “world’s reserve cryptocurrency” is under threat as China’s digital currency, DCEP, will most likely finish testing and go live in 2021. If China’s digital currency is successful, not only could it replace USDT as the world’s reserve cryptocurrency, but could threaten the dollar’s status as the world’s reserve currency (Forkcast). The West taking a “wait and see approach” to releasing a national digital currency like China, could wind up being its Achilles heel and stymie the West’s potential future dominance in the cryptocurrency space.

-Edward Puccio, Analyst BKCoin Capital LP