On Wednesday 7 January 2021, Bitcoin’s price crossed $40,000 for the first time. Since mainstream giants Visa and PayPal entered the space throughout 2020, cryptocurrencies have been, and look set to continue booming.
In the U.S, crypto exchanges made a staggering $ 1 billion in trading fee revenue in 2019 and the crypto space shows little sign of slowing down, with exchange growth poised for significant growth over the next decade – but what happens when a seemingly pretty picture isn’t matched with an adequate business models?
The crypto industry is caught in a loop whereby exchanges focus too heavily on an attractive front-end and flashy marketing, as opposed to necessary back-end developments. And therefore, exchanges often launch without the right priorities and end up with limited liquidity, leading to poor pricing, a struggle to retain customers and ultimately the business failing, opening doors for new exchanges to launch – a vicious cycle.
To last in the long run, there are various things exchanges must consider.
Prioritising liquidity over looks
The customer experience is an understandable focal point for any business on the rise. But currently new exchanges spend too much money on the user interface (UI), mobile apps and the launch marketing. While crucial, what traders actually need is often neglected. What good is sleek design without adequately powered backend systems?
Image appeals in the short term, but market depth is necessary to retain onboarded customers. Today, crypto trading is now concentrated among a few large exchanges such as Binance and OKEx. And as a result, smaller exchanges suffer liquidity issues and lose out as lower volumes lead to price discrepancies between them and major exchanges.
Among smaller exchanges, there is intense competition for trading and assets are traded across various venues, but at different prices and in different quantities, preventing exchanges from achieving deep liquidity and trading efficiency. Eventually, customers notice the pricing is not competitive and jump ship.
Such price disparities have led to an oligopoly for the established exchanges, preventing smaller, local exchanges from being competitive, in turn stifling wider adoption and holding the space back from reaching its next stage of maturity.
The problem is many exchanges desperately lack liquidity technology but they can achieve deep liquidity and provide best prices in real time through Straight-Through-Processing (STP) liquidity, where liquidity is aggregated using Smarted Order Routing (SOR) processes. After all, as electronic trading has become common, SORs have become a necessity for banks and brokers in traditional markets. There’s no reason why crypto should not follow suit.
Without real time pricing information, traders are blind. They demand real-time pricing, which is what keeps them using exchanges. Now, as Bitcoin hovers around the $35,000 mark, it is clear that such a volatile market calls for effective, innovative solutions that provide investors with real-time price offer quotes, allowing traders to continually make informed decisions that suit their needs.
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