In our previous article we looked at areas in which crypto exchanges are arguably falling short.

Sometimes however, it may be tempting to think that such issues don’t matter, particularly if you are unaware of the historical losses investors have suffered at the hands of exchange negligence or fraud. Or it just hadn’t happened to you. YET…

These mishaps have helped to highlight that exchanges occupy a central and vital role within crypto. As such, it is important to recognize and understand why they are important and how their impact can be felt right across the industry.

1. Exchanges hold considerable amounts of crypto in their balances

A recent report estimated that 15% of all BTC are on exchanges, going on to note that “3.8% of the total bitcoin supply is currently sitting in the top 5 wallets…known to be managed by major exchanges”.

That is purely BTC held on exchanges — it is reasonable to assume that given retail investors make up a higher proportion of altcoin holders, the proportion of altcoins on exchanges is actually higher than this.

Despite the persistent threats of losses, users leave their funds on exchanges because they trust them initially, are unaware of the risks involved or have too little technical knowledge about hot/cold wallets and or custodianship.

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Being susceptible to hacking and malfunction cryptocurrency exchanges indirectly put user funds at risk of theft. As long these cryptoassets hold any value, dishonest intruders and cybercriminals are naturally attracted, even incentivized to try and break the exchange’s firewalls and grab the loot.

Given the somewhat anonymous architecture of crypto, the lack of international regulation and consumer protection policies — these digital coins constitute a perfect gateway for criminals to steal someone else’s money.

Already, there have been plentiful examples of that.

The biggest and one of the best-known events is the hacking of Mt. Gox, which continues to impact price in the space years after the initial hack and theft occurred. As we will look at in our next piece, this can be lead to dire consequences for both users and networks alike.

2. Impact on price and adoption

Much of the coverage of cryptoassets focuses on their speculative investment potential. Exchanges affect their price in a number of ways. They also have an an indirect effect on the sort of investors who enter the market, and on how regulators treat them, which in turn suppresses demand and, likely, the price.

Jerry Brito, the Executive Director at Coin Center, an American based crypto lobbying firm, noted after the SEC rejected an Exchange Traded Fund (ETF) proposal that “the Winklevoss ETF proposal was rejected because the SEC found that the significant markets for Bitcoin tend to be unregulated overseas markets that are potentially subject to price manipulation”.