What Are Cryptocurrency Exchanges?
As in the case of traditional financial assets, exchanges play a key role in the cryptocurrency market. Exchanges can become an obstacle to the rapidly emerging world of digital assets. At first glance, they are very similar to stock exchanges – they reduce sellers with buyers and participate in the pricing process. However, they also have serious differences that expose investors to risks that they are not fully aware of. This worries regulators and leads to the emergence of new types of exchanges, devoid of these shortcomings.
What is the difference and difference between stock and cryptocurrency exchanges?
They perform the same function – provide asset turnover – but that is where their similarity ends. Cryptobirds keep investors’ assets and charge fees. In normal markets, these functions are performed by brokers. As a result, the profitability of cryptocurrency exchanges significantly exceeds traditional profitability.
For example, in 2017, Japan’s second largest crypto birth, Coincheck, was almost equal in terms of profitability with Japan Exchange Group, the operator of the country’s largest equity and derivative markets. Another important difference is in regulation: the supervisory authorities strictly monitor the stock markets, while digital in most jurisdictions are left to their own devices.
What risks arise from these differences?
Protection characteristic of stock markets does not exist on cryptocurrency ones. The biggest potential danger for an investor is the possibility of losing all your money due to a hacker attack or a bankruptcy exchange. So, in January, Coincheck lost nearly $ 500 million of tokens, and in June two crypto birds were hacked in South Korea. Since mid-2014, several exchanges have closed, including after hacking (including Mt. Gox, once the largest cryptocurrency exchange in the world), the activities of others have been stopped by the authorities.
How can investors protect themselves?
They can keep their digital tokens in personal wallets or so-called cold stores. However, they are usually not inclined to do so. Active traders act differently: they divide their assets into several parts and distribute them among various exchanges. Some platforms are trying to improve the security of trade. For example, the Gemini Trust used the services of the Nasdaq corporation to monitor potentially dangerous transactions with bitcoins and others.
What do regulators do to protect investors? Investors often hear warnings from authorities, especially with regard to volatile prices and the possibility of losing all assets. Many regulators require exchanges not to list the tokens, which are securities and are subject to relevant laws. In March, the head of the Bank of England, Mark Carney, said that it was time to put an end to “cryptocurrency anarchy” and bring the industry to the standards characteristic of the rest of the financial system.
How do the exchanges react?
Fundamental changes. There is a new generation of sites, closely adhering to the libertarian ideals of the blockchain. Known as decentralized trading platforms, these exchanges do not store customer funds and simply bring buyers together with sellers, allowing investors to conduct transactions. At their core, such exchanges are peer-to-peer platforms. According to Kelvin Wong, an enthusiast of decentralized exchanges and director of public relations fund OAX, this structure increases the transparency of work and the structure of commissions compared with the current model. The Foundation is developing decentralized trading platforms.
The answer to this question depends on who you ask it to. Sam Tabar, an AirSwap strategist who opened his own decentralized exchange in April, believes that the main theme of this year will be the migration of traders to new sites. Chia Hawk Lai, President of the Singapore Fintech Association, notes that the new type of exchanges has its drawbacks, for example, less user-friendliness and low technical support. David Lee, the author of the Handbook of Digital Currency (“Handbook of Digital Currency”), is convinced that in 5–10 years, the vast majority of cryptocurrency trading will take place on decentralized sites.