Cryptocurrency exchanges: still in school

Crypto exchanges in their current form fulfill only a small part of these functions.

They do provide liquidity to the system as they have enabled a 24/7 trading dimension in which thousands of crypto assets are available for trade no matter where people live. As long as you have an internet connection, you’re good to go.

However, as we will later analyze crypto exchanges may also be presently suppressing liquidity by deterring market participants from entering the space.

While it would be fair to say they provide liquidity (at least in some cases), with other functions, there is less certainty. Liquidity aids to facilitate efficient pricing but only when there is no market manipulation occurring.

No stock exchange can ever be wholly free of market manipulation, future articles will analyze how crypto exchanges, in particular, are plagued by practices which make pricing distinctly inefficient. The sad thing is that unknowing retail traders are the ones who cover the costs…

While crypto exchanges may provide a venue for two investors to securely transact, they are again lacking when it comes to safety measures. Since crypto exchanges first sprung up, many have been run by inexperienced, under-resourced or opaque teams — a far cry from the transparent and professional operators of normal exchanges. Naturally, it leads to insecure practices which can put investors at risk.

Capital allocation is harder to scrutinize. While exchanges have certainly afforded investors access to a plethora of crypto assets, many of them have no formal listing process other than simply to charge a listing fee.

The fees are often extortionate, sometimes reaching as high as $5M depending on the exchange. This far-right utopian environment enables fraudulent projects to be listed without any due diligence made, the sale of non-compliant tokens that are subsequently delisted, ‘pump and dumps’ of thinly traded assets and other issues which can render large losses to holders, as well as cause setbacks to the industry in general.

It is natural that crypto exchanges do not match up to their traditional counterparts yet. They are new, have largely existed without external regulation and provide means to exchange an asset which, even now, few fully understand.

However, they have grown so big already, that it is impossible to ignore them.

Stay tuned to CoinStruction blog in which we will continue investigating issues nacking cryptocurrency exchanges. We will not stop until we get to the bottom of it. Why? Because we want to do and be better. And for that learning from the mistakes of others is crucial.