What does the future look like for crypto exchanges?
Hundreds of crypto exchanges have been started in the past 10 years. And exchanges have been the killer app of crypto - at least so far. And one reason for that is because they employ the #1 revenue model for creating value - transaction based revenue. Crypto exchanges generate billions of dollars of trading fees every year. These are wonderful businesses because they scale so well. Trading one crypto is pretty much the same as trading any other crypto (except for a little development work). Exchange revenues have grown alongside the growth in blockchain technology. The vast majority of trading today is done on exchanges. Centralized exchanges, in fact. Which is a little strange when you think about it. Because one of the most celebrated aspects of crypto is the fact that it can be decentralized. But in the trade-off between convenience versus decentralization, consumers always choose convenience. And centralized exchanges are a far more convenient way to buy or sell a given quantity of crypto.
So does the future look bright for crypto exchanges? I was thinking about this question the other day. What should we expect in the next 2, 3, or 5 years? A lot more new exchanges? About the same number? Maybe a lot fewer? I am going with a lot fewer. And that doesn’t mean I think there will be less crypto trading. In fact, I think crypto trading volume is going to continue to grow. But that trading VOLUME will be funneled through a smaller and smaller number of centralized exchanges.
So what’s my reasoning for this? The bar keeps getting higher for crypto exchanges. Traders want more product types, like derivatives. They want more fiat deposit and withdrawal options. They want better customer service. They want deeper liquidity. And of course, they want more protection, more security, for the crypto they’ve consigned to exchanges. The Gemini Exchange in fact has just launched its own Bermuda-based insurance company. It now has $200 million of insurance coverage protecting crypto deposits of its customers. And let’s not forget, exchanges are now subject to far more regulation. Which means their costs are rising.
So I believe, we’ve hit the peak number of exchanges out there in the world. In the next 2 to 3 years, expect to see lots of zombie crypto exchanges shutting down. Every exchange not in the top 25 (from a real trading volume perspective) is probably at risk. And remember almost all crypto exchanges are consignment-based. Meaning to use them, the exchange has to hold your crypto. And I don’t like the idea of exchanges shutting down that are holding my crypto. Even if the risk of them running off with your tokens is low, there’s still a high risk that their customer service levels will collapse, making it very hard to withdraw your crypto. And having gone through that very same process with the Poloniex crypto exchange, which as you probably know shut down in the U.S. and was sold off, experiencing that and the way that their customer service just went to hell made me realize that if there’s even an inkling of an exchange cutting back or ultimately shutting down, selling, I’d suggest withdraw your tokens and go somewhere else.
So how is this all going to shake out? In general I think this will be good for crypto holders - this notion that there are fewer exchanges, they’ll have better liquidity across a smaller number of them which means with better liquidity comes lower costs, lower costs of trading. I do hope that “decentralized” exchanges start to get real traction. Because that plays into the fully decentralized “Satoshi Future” that I think we all want to see one day. But a lot more needs to happen for decentralized exchanges to grab a meaningful piece of crypto trading activity.If you liked what you heard on this video, please hit subscribe, make a comment, and I’ll talk to you next time.
Disclaimer: The information contained herein is for general informational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice. The content of this video is solely the opinions of the speaker(s). Buying and selling cryptocurrencies poses considerable risk of loss. The speaker(s) does not guarantee any particular outcome. Past performance does not guarantee future results. You should do your own research, incorporating your own personal financial situation and risk tolerances, before making any purchase or trading decisions. The speaker(s) is not an investment advisor, broker or dealer. Your financial decisions are solely your responsibility.
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