The announcement of Coinbase’s IPO has been described by Fortune Magazine as a “milestone for the crypto industry”. Much like Netscape’s IPO announcement, which signaled the legitimacy of the internet, Coinbase’s upcoming public offering signals to the public that cryptocurrency trading is legitimate, legal and safe in the eyes of the Securities and Exchange Commission. And now investors have the option to own stocks on the largest crypto trading platform in the US.
As a result, many see an investment in Coinbase as an investment in the future of crypto trading. It is the highest volume US crypto exchange with three times the volume of its closest US competitor. The greatest of all in the US has to be the world leader. Except that it isn’t. And conventional wisdom and current market realities are very far apart.
In order to understand the nuances of the crypto trading platform market, one needs to understand some key facts.
These are important implications that affect current market maturity and the problems institutional crypto traders face today. There is no single exchange that gives traders access to global trading markets, cross-border pricing, global best prices, global liquidity, or decentralized trading markets.
The crypto trading market is still highly fragmented and has no dominant player
Together, the five largest crypto exchanges make up only 41% of total global trading volume. Coinbase, the largest exchange in the US, generates only 2.1% of the world’s volume. The number one in the USA only ranks 19th worldwide. There is no dominant player in the world market as we would expect in a more mature market.
According to the data above, the New York Stock Exchange’s share of global stock trading is more than twelve times that of Coinbase, and the two largest US stock exchanges account for over 50% of the world’s daily trading volume, while the two largest US crypto exchanges only make up 3% of global trade.
Compared to traditional stocks, the crypto market is also highly fragmented. The two largest exchanges account for 51% of daily trading volume while the three largest crypto exchanges account for only 27% of daily trading volume.
There is no single global trade market
The crypto trading market is still in its infancy. From my conversations with institutional traders and independent professional traders, I have learned that institutions still require institutional skills that are not yet available on a single platform, such as:
- Global pricing – e.g. B. Prices from global markets normalized for the local currency.
- Global Best Bid and Offer – global order book normalized for foreign exchange and fees in local currency.
- Global Liquidity Access – Access to global liquidity, not just an exchange.
Each exchange is its own trading lake that is not connected by a channel. In the US, a trader can only trade with 2.1% of global users, with the order backlog being completely independent of other US trading markets – e.g. B. Coinbase and Kraken.
Global trading volume, liquidity and pricing are only available to those who are able to manage multiple accounts across multiple exchanges in multiple countries and continents. It’s a huge task that ties up both legal and technical resources.
It is clear that traders would benefit from a single global order book normalized in a single currency to find the best global prices along with the liquidity required to execute large block trades. The industry desperately needs crypto equivalent to the National Best Bid and Offer of traditional securities.
Centralized exchanges are only part of the trading picture
Binance and Coinbase are centralized exchanges that match buyer orders with seller orders, process deals and clear accounts. Customers’ crypto assets are held by an exchange and users only trade with other users on the same exchange. Even overall, centralized exchanges do not capture the total volume of digital assets traded.
This is because the decentralized exchanges are on the rise, enabling peer-to-peer trades (or swaps) where assets are exchanged directly between traders, usually without you knowing your client. At one point in 2020, Uniswap’s trading volume exceeded that of Coinbase. It is possible for DEXs to reach an even level with CEXs, so that one cannot get a complete picture of the crypto trading market without considering DEXs.
The CEXs figuring out how to incorporate DEX pricing and liquidity into their trading will have an important advantage.
The decentralized exchange is growing, but a true-to-scale infrastructure is missing
Decentralized exchanges generate approximately 15% of total crypto trading volume (based on CoinMarketCap data as of February 16, 2021). DEX trading has grown rapidly. Uniswap’s trading volume exceeded that of Coinbase in 2020 – a feat achieved with just 20 employees. Today, Venus is trending alongside Binance, which at the time of writing is the market leader in 24-hour trading volume.
Professional traders can rate DEXs for the security of wallet-to-wallet or peer-to-peer trades. However, there are two problems. First, institutional traders cannot trade DEXs without the counterparty KYC. Second, the public chain technology that supports DEXs is slower and more expensive than exchange trading.
Institutional investors need faster DEXs with lower fees and robust KYC procedures. A DEX needs to be built on a faster, cheaper blockchain to attract institutional traders.
There are no truly centralized exchanges – only brokers
What’s even more confusing is that today’s crypto exchanges are more like regional brokers than true global exchanges. Compare and contrast, for example, trading with Apple (AAPL) via E-Trade with trading with Bitcoin (BTC) via Coinbase.
A professional trader in the USA who wants to trade BTC only accesses a small part of the global market through Coinbase. Pricing and liquidity are only included in Coinbase’s BTC / USD order book. Over 97% of the world’s supply, demand, pricing, and liquidity is only accessible through hundreds of other exchanges.
In summary, selling Apple through E-Trade compared to selling Bitcoin through Coinbase:
- E-trade grants Nasdaq, which captures almost 100% of AAPL spot trades.
- Coinbase places orders on its own order book, which records 2.1% of all global trades.
There is no truly global crypto trading market, but hundreds of smaller local markets. Imagine if AAPL sells on over 300 different exchanges, each with their own buyers and sellers. This is the current state of the global crypto market.
This has two problems. First, trading on a CEX negates many of the benefits of decentralized assets. Second, crypto trading is divided into hundreds of discrete trading lakes – each with their own local supply and demand for fiat / crypto.
Decentralization ensures that no single entity can completely control a cryptocurrency. Users give up significant control when depositing with centralized exchanges that manage token listing permissions, custody, order matching and execution, and brokerage services.
This centralized power harbors security and compliance risks that have led to market criticism. In fact, traders in Asia Pacific have launched several coin withdrawal campaigns to demonstrate their opposition to CEX trading. The younger generation is averse to centralized power and dares to question it, as the recent short selling war in the United States shows.
Centralized exchanges also have limited access to the world market and are severely restricted. Why? Exchanges like Coinbase and Gemini accept users from limited regions (US only) with limited fiat currency pairs (US dollars only), as opposed to E-Trade, which opens the doors for traders to a wide variety of exchanges and stocks, exchange traded funds and more. In contrast, CEXs close the doors to everyone else, severely limiting pricing and liquidity, resulting in higher spreads, lower fill rates, higher slippage, and generally inefficient markets. The concept of Best Bid and Offer does not yet exist in the crypto world, as the BBO on Coinbase is not identical to that of Gemini, Binance or Huobi.
Professional traders are underserved
From the perspective of professional traders, the market maturity and required global trading capabilities are not yet available. Market segmentation for trading cryptocurrencies is still in its infancy and the needs of professional traders are far from being met because: (1) they do not have efficient access to a global market; (2) They have no access to the best prices in a global market and no access to institutional quality liquidity.
In addition, DEX trading is not yet feasible for institutional traders due to the lack of KYC during onboarding. However, the average Uniswap dealer is far more active. Uniswap users are fully on the chain, open and transparent, and their 300,000 users are trading more than Coinbase’s, which claims to have 35 million users. As a result, an entire whale market is traded outside of central exchanges, which completely destroys the market’s misperception that Uniswap and DEX users are primarily retail investors.
There is no such thing as a trading market that offers true global coverage, and retailers and institutional distributors cannot access a truly global market. And there is no trading market that offers institutional grade DEX trading.
The digitization of assets will drive growth
Industry consensus is that continued asset digitization is inevitable. Bitcoin and Ether (ETH) are blockchain-native tokens that represent the main trading volume of the current cryptocurrency trading market. However, the market capitalization for cryptocurrencies is less than half that of Apple.
The stock market is almost negligible compared to the untapped digitized asset market. The chance is great, but it’s also too early to predict the outcome.
Many exchanges expose traders to compliance risks
Some of the world’s leading exchanges allow a wide variety of controversial tokens to be traded. Anti-money laundering regulations on many exchanges are not robust enough. Despite claims to have licenses in some countries, it is hard to imagine that offering derivatives to users around the world through the use of an exchange license in a single country is legitimate. These compliance risks pose a serious challenge to the stability of the position of some exchanges. Not so long ago, the derivatives market landscape changed rapidly following the BitMEX indictment, resulting in a loss of users and a decline in trading volume.
Innovations in institutional exchange technologies are not yet widespread. Volume rankings tell today’s story. Tomorrow’s story is told by trading markets that offer true global best bid and offer pricing, institutional access to DEX prices and liquidity, and the ability to execute global trading strategies on a single platform.
This article does not contain any investment recommendations or recommendations. Every step of investing and trading involves risk, and readers should conduct their own research in making their decision.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Haohan Xu is CEO of Apifiny, a global network for liquidity and financial assets transfer. Prior to Apifiny, Haohan was an active investor in the stock markets and a trader in the digital asset markets. Haohan holds a BS in Operations Research with a minor in Computer Science from Columbia University.