Crypto assets are commonly visualized using graphs and charts, with their trajectory clearly plotted. Over a long enough timeframe, you can observe phases of price discovery, consolidation, mania, all-time highs and then a steep, often irrecoverable, decline.
Interestingly, the same model can be applied to cryptocurrency exchanges. Their aggregated performance can be tracked over the years, following the emergence of the first trading platforms in 2010, and the dominance of Mt.Gox shortly thereafter. Crypto has since freed itself from the shackles of a single exchange, and in many respects is in better health in 2019. Security has improved, liquidity increased, UX been enhanced, mobile-friendliness developed, and the range of products offered by exchanges has grown steadily. Given the proliferation of cryptocurrency exchanges, it would be easy to conclude that centralized exchanges are in better shape than ever. A closer examination of their market chart, however, reveals some curious anomalies.
The Diminishing Role of Centralized Exchanges
Despite the cryptocurrency ecosystem thriving by all accounts, with development work, increased global adoption, the launch of Bakkt physically settled futures, and other integrations at institutional and retail level, not everything is on the up. Trading volumes on the leading exchanges have dropped significantly, with Binance and Coinbase at six-month lows. Following June, when the BTC price briefly spiked, volumes have dropped 60%.
There are a number of factors that this drop-off can be attributed to; the failure of bitcoin to hold $10K territory (and then $8K territory); dissatisfaction at invasive compliance procedures that have sucked all the pleasure out of trading; and, of course, more attractive options elsewhere. Diminished volumes on the major exchanges should not be mistaken for correspondingly reduced volumes throughout the industry. Some traders have simply gone elsewhere, to crypto changing services that can better serve their needs – even if many of these platforms take their orders from centralized exchanges.
Pauline Shangett, CCO at ChangeNOW.io, has witnessed first-hand the evolution of cryptocurrency exchanges. She doesn’t see centralized exchanges going anywhere, but believes that for non-traders “using centralized exchanges for doing small and easy operations with crypto is akin to using a powerful gaming laptop for web surfing – possible, but not really necessary.”
“Regular investors don’t need to know how trading works,” adds Shangett, “they don’t need to understand the mechanics of exchanges as they tend to get really confusing. That’s where services like ours come into play – we are really good traders who are ready to do all the dirty work for you, so that you don’t have to.”
Reclaiming Anonymity in an Era of Eroding Privacy
The anonymity, or at least pseudonymity, that was once taken for granted with Bitcoin has given way to an assumption that what little privacy the blockchain bestows will be stripped away by forensics firms and encroaching compliance requests, forcing traders to prove their coins are ‘clean.’ There is evidence that this too has diminished the lure of centralized exchanges, driving traders to services that are more measured in their data requests.
Most traders, it should be noted, accept the need for KYC/AML to be enforced by crypto exchanges. But they take exception to being forced to take selfies clutching identification documents and have them uploaded to centralized servers where they form a honeypot for hackers. This isn’t just scaremongering either, as shown by the recent release of customer data from a compromised KYC partner of Binance. Coupled with the ever-watchful blockchain surveillance partners, and the need to prove one’s coins are sufficiently ‘untainted’ before depositing them into an exchange, and it’s no wonder traders are looking to get their crypto kicks elsewhere.
The Future of Crypto Exchange
In the utopian version of the future, the crypto exchange landscape is one in which value transfer occurs seamlessly, with CEX, DEX and hybrid exchanges boasting indistinguishable UX, and minimal trade-offs for traders. That day may be years away, or may never even materialize, should new trading mechanisms emerge to replace the systems we know and use today. This isn’t as fanciful as it may seem; in Bitcoin’s early days, tools such as DEXs, crypto-changing platforms and atomic swaps were unheard of.
For now, it seems likely that different exchanges will keep plowing their own furrow, catering to distinct, but occasionally overlapping, audiences: centralized exchanges for institutional traders and retail traders seeking margin products; DEXs for smaller traders seeking token exchanges; and crypto-swapping platforms for individuals who want to get their hands on cryptocurrency with the minimum of fuss. Just as there are many cryptos for many different purposes, the same is now true of the exchanges which house them. The crypto exchange business is not a zero-sum game; trustworthy platforms that can distinguish themselves from the competition will survive and thrive.
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