The Future of Crypto Exchanges
The FTX collapse raises huge questions about the future of Centralised Crypto-Exchanges, in fact all exchanges. Here is my view:
There are many sorts of crypto-exchanges as the market understands them:
- [Centralised] Trading exchanges designed for trading; individual or institutional. Trading using trading strategies, not gambling or investment. They must offer ‘trading services’ such as leveraged trading, large numbers of assets and, most importantly, the highest liquidity. Binance, Coinbase Pro or Kracken.
- Institutional trading exchanges designed for companies from trading funds, investment companies. they dont service individuals, like Genesis or Archax, London.
- Retail trading platforms that have specific trading support and normally offer many different assets like FX, Commodities, like eToro.
- Decentralised Trading Exchanges [DEX]. Simple code based trading. Used only by crypto-savvy and there are many questions over the amount of ‘fake trading’.
- Derivative Trading Exchanges. See No1 as they are dominated by Spot Trading exchanges.
- Investment/trading/wealth apps/wallets like Coinbase, Luno, Coinspot, Blockchain, etc. Also offered by payment or share trading apps like Robinhood, Paypal. Buy simple. There are many that claim to be ‘exchanges’ yet are poor trading exchanges, see No1, Investment Apps rely on trading exchanges for liquidity.
- Institutional/Private Digital Asset Wealth platforms. Focus on asset management of institutional and HNWI money. Only top assets. Full service.
- Retail Digital Asset Wealth platforms. Focus on public. Only top assets. see dacxi.com.
- Specialist exchanges. There will be exchanges for tokenized green projects, for NFTs, IP tokens, Community tokens and secondary markets for low liquidity asset tokens.
We could rave for hours about likely developments yet the following is so obvious…
- Regulations will mean trading exchanges will need large reserves, stop undertaking risky lending in leverage. This will eliminate alot of exchanges
- Institutions, especially hedge fund trading, will dominate trading volumes yet only focused on top 10 coins. They will only use the largest regulated exchange. Thus all liquidity to focus on them. All other exchanges will have such small volumes they will die.
- Major stock exchanges with the best institutional relationships with buy an exchange and that exchange NASDAQ/NYSE/LSE/ASX/SGX/,etc DA [digital assets] will dominate.
- There will be a ‘demand’ test for coins where they evaluate if there is enough intrinsic demand underlying the coin to be worth listing. 99.?% of all coins today would fail that test. Exchanges will only trade the top 100.
- The little coins will have to prove that they are not simply an unlicensed capital raising. If they cannot then only a security licensed exchange will list them.
- There will be a global ‘unregulated’ market for the money that does not want to be trapped by the taxation of the local country. There is only about $10trillion in such capital!
The BIG red flags!
- Counter-party risk services. Any exchange that offers services with counter-party risk live leverage or staking.
- Related company risks. If they have an associated trading company that trades in marketing making or arbitrage like Alameda Research with FTX is massive no-no.
- Venture investment. Like related party risks, if their ‘venture’ arm has anything but one-way investment, beware. They have to have big money to do this and it takes separate skill set.
My predictions in 5 years:
- Each country will have one major exchange/market for the top 20 coins. Not counting stablecoins. My guess is that it will be local stockmarket. They will have the liquidity. ASX DA market. This will also be derivatives.
- The global unregulated exchange will be Binance. It could also the largest exchange. To comply with a regulatory environment, it will demand a ‘demand test’ which will eliminate all by 200 coins.
- There will be local personal trading exchanges like etoro who will also gain liquidity from the dominate exchange. For those that think that exchanges can trade globally, remember that to trade together, exchanges must deposit funds and regulators may ban this action internationally.
- Trading Apps will merge with investment apps which will merge with share investment apps which will merge with payment apps which will merge with digital banks. Yep on digital financial services company. Banking/Payments/Wealth. Its already happening. Its called market consolidation. They will take on Retail Banks as they go more digital.
- All the little coins will go onto DEX which I doubt will ever develop out of niche. Gambling sites.
- Institutional/Private Wealth and Retail Wealth platforms will evolve with tokenization of financial assets to eventually be the normal structure. ‘Crypto’ will only be a few crypto-currencies such as bitcoin and ETH. Maybe 10 highly liquid assets traded on the main platform.
- Specialist exchanges will boom and consolidate into a few sector leaders.
What happens to the other 400+ exchanges?
They die or are bought out. Yet why would an exchange buy out another exchange which offers similar assets and services? Even customer bases will hold little value if the market is consolidating.
Which exchanges are safe today?
Regulated public exchanges are the most powerful. Transparent. Trusted. Coinbase is No1.
Kracken is bank-licensed so has unique credibility and strength.
Binance is so big, I would trust my money with them. All they do is to keep doing what they are doing and they make so much money from highest liquidity that most competitors die. Their UAE home is the smartest place for them. They are not very transparent yet why would they want to risk doing stupid risky stuff? I don’t think CZ is like that.
Exchanges that do not offer risky services [See Big Red Flags.] ‘could’ be safe. Then you have to hope they separate client assets. Store assets in custody.
Cold wallets. ie moving your assets onto devices like ledger is great for the 5% who know how to do this yet stupid for everyone else as it adds device security and password risk.
Wealth platforms that operate within licensed environments as they probably split operational and client assets. They also dont do the risky country party services like leverage and staking.
Impact on Assets?
Massive concentration of trading on the top 10–20 assets.
Trading of other 100 top coins will be limited unless they have proven real underlying demand. If the use case is ‘blockchain fees’ then they must prove the amount currently spent on fees and the growth of the ecosystem to justify demand.
20,000+ other tokens will go illiquid as they will have no support so will move to DEX.
The development of the exchange market is pretty obvious if you think about the current market for financial services and the uniqueness of potential crypto-based assets and investor groups.
The market is still new yet the shake-out is happening so expect most of the current market to die over next few years. Be smart with your assets.