Challenges and issues in cryptocurrency trading: beyond the controversies
Cryptocurrencies and blockchain technology are often portrayed as the big challenger to the current financial system, promising to fight corporate red tape, increase financial inclusion and create a more just and transparent economy. While all this is true, it’s not always rainbows and unicorns in the crypto world.
Different cryptocurrency exchanges can offer various types of cryptocurrencies and have different terms, policies, payment methods, and fees. Exchanges also differ on aspects such as security, user-friendliness, functionality, and design. These factors can all play a significant part when choosing the most suitable exchange.
Talks over regulation of digital currencies and crypto exchanges are a way to help the market become healthier and more transparent. Cryptocurrencies and exchanges indeed have many issues to address and challenges to overcome. Here, we highlight some of the main concerns and recent issues that are preventing the crypto revolution from progressing to its next stage.
The biggest problem currently in the crypto market is the lack of security. Indeed, with news of hackings and breaches often making headlines, users are demanding more protection over their assets and data.
It is important to remember that as technology becomes more sophisticated, so do hackers. Exchanges are essentially so vulnerable to hacks because they centralise the risk, so further decentralisation can be an option in the pursuit for maximum security.
Security is indeed an urgent and weighty matter. Coin Desk reports that each day, $2.7 million is stolen from exchanges, with the amount of cryptocurrency taken in 2018 having increased 13 times compared to the previous year. This amounts to $2.7 million in crypto assets being stolen every day, or $1,860 each minute.
Indeed, it is a well-established fact that the majority of ICOs end up unsuccessful — some of them even fraudulent. Furthermore, many expensive crypto projects often make a case for themselves claiming they are decentralised, when in reality, data from Token Analyst for Yahoo Finance showed that nearly 80% of the top 50 coins are held by the top 20 wallets. In 16 cases, the 20 biggest wallets held more than 90% of total token supply.
Much like in the more traditional economy, power dynamics also underline the negotiations and collaborations set in the crypto sphere, and the nuances of marketing strategies can mislead users and investors.
The lack of transparency, accountability and professionalism from renowned institutions can poison the benefits of digital currencies and undermine the strength and influence of blockchain adoption in different industries beyond finance. True blockchain believers call for an end to sketchy practices in the financial system and market structures, promoting widespread professionalism and ethical standards.
Initial Coin Offerings are a great way to attract investors, but part of them resulted to be scams. Exchanges need to be careful and strict enough only to list those crypto coins which are reliable and ensure that the right assessment is performed.
Some exchanges charge a single flat fee, for example, 0.2% of the transaction value, on all trades. But many exchanges split their trading fees into two separate fees: the maker fee and the taker fee.
In some cases, maker fees can be higher than the taker because the maker adds liquidity to the market, so the exchange ‘rewards’ the trader.
Liquidity is a vital element for any of the market. A lack thereof creates an imbalanced environment, and things go out of control. Due to the decreased liquidity, orders are not placed/executed on time, and the doors are open for large holders to manipulate prices. Additionally, with a lack of liquidity, markets become more volatile and see more price slippages.
A secondary issue of reduced liquidity is that it puts the power into the hands of cryptocurrency exchanges with large liquidity. Some major exchanges now charge up to $1 million to get tokens listed, essentially selling liquidity to the token projects.
Currently, the majority of crypt exchanges are only lightly regulated, leaving room for sometimes shady or abusive manoeuvres. It is reported that crypto exchanges use bots to manipulate the prices of coins. Last September, cryptocurrency trader and analyst Alex Kruger exposed a promotion on Bithumb which inflated the trading volume on the exchange.
“There currently are $250 million [in] fake volume traded at [the] Korean crypto exchange Bithumb, every day at 11 a.m. Korean Time, since Aug. 25. Bithumb offers 120 percent payback of trading fees as an airdrop. Trading fees are 0.15 percent taker. To collect the full KRW 1 billion rebate, a wash trader must thus trade KRW 278 billion. That is $250 million in daily fake volume. Notice how 31K Bitcoin is traded at exactly 11 a.m,” Kruger explained.
While cryptocurrency transactions are known for being fast, delays can happen and can be a way to protect users from hackings or fraudulent transactions. Exchanges sometimes delay transactions if they suspect the user did not authorize the transactions.
In light of these flaws and loopholes, and continuing cases of hacks and breaches of exchanges, regulations would be welcomed if tailored to ensure transparency and consumer protections.
Crypto experts have anticipated 2019 is on track to be the year of crypto regulations
This year started with stronger calls for rules and regulations all around the world. In January, two major European regulatory bodies, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have publicly called for better assessments of crypto technology and its impacts to develop appropriate regulations.
In the US, the Securities and Exchange Commission (SEC) is applying their regulatory guidance to cryptocurrency projects as it considers another form of securities.
Recent controversies over exchanges ’ lack of professionalism and transparency are likely to prompt exchange regulations to be in place soon.
Over the last few months, we have been seeing more moves from centralised exchanges towards decentralisation. Binance, for example, announced earlier this month that it is about to launch its decentralised exchange, Binance DEX, for public testing.
There various advantages to decentralisation. A DEX ensures the poor and unbanked can participate in the global economy: anyone can store and transfer wealth to anyone anywhere in the world, almost at no cost. Another benefit of decentralised exchanges is that users are fully in control of their data as there is no central authority storing or managing it.
How does the future look like?
While centralised crypto exchanges have been the tradition so far, they have somewhat given way to the decentralised crypto exchanges. The main objective behind bitcoin and blockchain is decentralisation and thus, both the CEX’s and DEX’s should come together to develop a hybrid model which benefits all of the crypto ecosystem.
Hybrid crypto exchanges can represent a viable option that bridges the gap between the benefits of a centralised exchange and those of a decentralised exchange. This is the way to gain the trust of numerous users and the cooperation of huge investors, while eliminating the element of subordination to a third-party and ensuring reliable storage.
If there is one thing we can learn from the recent developments and news, it is to look at the shortcomings of the so-called transparent crypto sphere, realise there is plenty of work to be done in this realm, and use the combination of technology, knowledge and accountability to fight these flaws. For the blockchain & crypto revolution to produce its best outcomes, it is important to address the factors that undermine its integrity.
Keep an eye out for a special episode on Financial Fox about crypto exchanges and the challenges to overcome. Follow us on @cassiopeia_ltd and subscribe to our YouTube channel.
Special guests: the crypto evangelist Chico Crypto @chicocrypto & Alexander Fred, Technology Researcher and Writer of @beincrypto, the truly independent bitcoin & cryptocurrency news.