The universe of exchanges seems to be constantly exploding like the aftermath of a digital Big Bang
BREAKERMAG
April 5, 2019
By Robert Stowe England
There are 253 crypto exchanges listed on CoinMarketCap. A year ago there were 208. More exchanges are in the planning stages. The universe of crypto exchanges seems to be constantly exploding, like the aftermath of a digital Big Bang. Save for an occasional exchange blowout here and there (QuadrigaCX comes to mind), all this has been occurring amid a sharp decline in values and trading volumes since the crypto market peaked in early 2018.
Many exchanges appear to be thriving, as crypto asset listings also continue to multiply. And thereby a central mystery emerges. How do the exchanges remain profitable and viable as they face intensifying competition from new entrants? Since they are privately owned, the details of their inner workings remain closely held by their owners. An observer is reduced to reading tea leaves to make an informed opinion about just how profitable the exchanges might be.
Paradoxically, while recent trading volume reported by CoinMarketCap is down one third from the peak, reported crypto trading activity as a share of the overall market capitalization has quadrupled from 5 percent at the peak of the market in January 2018 to 21 percent in March 2019. On March 23, average trading volume ($29 billion) was 20.9 percent of the overall market cap of $141 billion. In other words, market caps may be down from their highs, but the volume of assets in play has not fallen at the same rate.
There’s a good, if troubling, reason for that: The high numbers may be fabricated through wash trading and other market manipulations. That charge was one of several to emerge from a recent study by Bitwise Asset Management that claimed 95 percent of self-reported volumes in bitcoin trading are fake and that all the real trading occurs on only 10 exchanges, nine of them under some form of U.S. regulatory oversight.
The Bitwise study, part of a filing with the SEC in March, made headlines and sparked widespread commentary. “Wow much fake, such crime lords,” said the Australia-based crypto trader, investor and ex-professional poker player Sylvain Ribes in a tweet March 23 in response to the release of the study. Ribes knows a bit about the matter. Last summer, he did his own analysis of order books of all the major exchanges. He found 94 percent of the trades to be “fake” based on how prices moved sharply lower in response to a sale of $50,000 of bitcoin. (If there were real market makers, the price would not plunge so steeply on a trade size that any real exchange should be able to handle without much disruption.)
Not everyone is buying the idea that trading volume reports are fabricated. “It is difficult to make the claim that trades are in fact fake, based on these studies alone,” says Constantine Tsavliris, research analyst at London-based CryptoCompare, which publishes monthly exchange reviews. Such claims should be treated more as “clues” as to which exchanges might be lower quality, he contends.
With the proliferation of exchanges and a growing number of crypto assets trading on them, competition appears to have intensified in a way that’s beneficial to traders. “I believe the overall cost of crypto exchange fees is coming down and that will continue over time,” says Henry James, deputy chief executive officer at Mauritius-based Fincross, an investment banking firm that advises security token sponsors.
Exchanges have proliferated because barriers-to-entry are low, especially outside the regulatory oversight of the U.S. or Western Europe. “Building a matching engine and putting that online is, in many cases, all you need to do,” says James.
The crush of competition is, in fact, having an effect on fees earned by exchanges as they “find more creative ways to reduce fees to attract new clients,” says Simon Grunfeld, senior vice president of business operations for U.S.-based Daollar Group, which owns the 55 Global Markets Exchange that operates on a license from Estonia. “They might reduce commissions and inflate the spreads. Or reduce the spreads and inflate the commissions.” No matter how the exchanges may reallocate revised fee schedules among traders, the overall earnings for exchanges (and costs to traders) is a little lower than it was a year ago, Grunfeld says.
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