Fortune Magazine has applauded Coinbase’s initial public offering as “a milestone for the crypto industry.”
The impending public offering of Coinbase, in a manner similar to the Netscape IPO announcement, which signaled the legitimacy of the internet to the general public, signals to the general public that cryptocurrency trading is legitimate, legal, and secure in the eyes of the United States Securities and Exchange Commission.
Furthermore, investors now have the opportunity to purchase stock on the largest cryptocurrency trading platform in the United States.
Therefore, many investors consider an investment in Coinbase to be an investment in the future of cryptocurrency trading.
It is the most active cryptocurrency exchange in the United States, with three times the volume of its nearest competitor in the country.
The most important thing in the United States must be the most important thing in the world.
Except that it isn’t.
Furthermore, conventional wisdom and current market realities are diametrically opposed.
In order to fully comprehend the nuances of the cryptocurrency trading platform market, it is necessary to first comprehend some fundamental facts.
These are significant implications that influence market maturity and the issues confronting institutional crypto traders today. There is no single exchange that provides access to global trading markets, cross-border price discovery, global best prices, global liquidity, or decentralized trading markets for traders.
The cryptocurrency trading market remains highly fragmented, with no dominant leader
The combined trading volume of the top five cryptocurrency exchanges accounts for only 41 percent of the total global trading volume.
Coinbase, the largest cryptocurrency exchange in the United States, accounts for only 2.1 percent of global volume. The number one ranked exchange in the United States is ranked only 19th in the world. There is no dominant player in the global market, which is in contrast to what we would expect to see in a more mature market.
According to the data presented above, the New York Stock Exchange’s share of global equity trading is more than 12 times greater than Coinbase’s, and the top two U.S. equity exchanges account for more than 50 percent of global daily trading volume, whereas the top two U.S. crypto exchanges account for only 3 percent of global trading volume, according to the data presented above.
In addition to being highly fragmented, the cryptocurrency market is also highly volatile. Compared to the top two stock exchanges, which account for 51 percent of daily trading volume, the top three cryptocurrency exchanges account for only 27 percent of total daily trading volume.
No unified global trading market exists
The cryptocurrency trading market is still in its early stages. Based on my conversations with institutional traders and independent professional traders, I’ve learned that institutions are still clamoring for institutional-grade capabilities that aren’t yet available on a single platform, such as those that include:
- Price discovery on a global scale — for example, prices from global markets normalized for local currency.
- Global Best Bid and Offer — a global order book that has been normalized for foreign exchange and fees in local currency to reflect the current market conditions.
- Global liquidity access entails having access to global liquidity rather than just the liquidity of a single exchange.
Each exchange is a trading “lake” in and of itself, with no “canal” connecting them. When trading in the United States, traders have access to an order book that is completely separate and distinct from other U.S. trading markets, such as Coinbase and Kraken, and can only trade with 2.1 percent of global users.
Global trading volume, liquidity, and price discovery are only available to those who are able to manage multiple accounts across multiple exchanges in multiple countries and continents, as well as across multiple time zones. It is a difficult task that will consume both legal and technical resources.
There is no doubt that traders would benefit from a single, global order book that was normalized in a single currency, as this would allow them to discover the best global prices while also providing the liquidity necessary to execute large block trades. The crypto industry is in desperate need of a National Best Bid and Offer, which is the traditional securities industry’s equivalent of the National Best Bid and Offer.
Centralized exchanges are only part of the trading picture
Binance and Coinbase are centralized exchanges that match buyers’ orders with sellers’ orders, executing trades and settling accounts as a result of their operations.
Clients’ cryptoassets are held in trust by the exchange, and users can only transact with other users who are also members of the same exchange.
Even when looking at the totality of digital asset trading volume, centralized exchanges do not account for the majority of it.
This is due to the rise of decentralized exchanges, which allow for peer-to-peer trades (or swaps), in which assets are exchanged directly between traders, typically without the need for Know Your Customer (KYC) documentation.
Uniswap’s trading volume surpassed that of Coinbase at one point during the calendar year 2020.
Because it is possible that DEXs will achieve parity with CEXs in the future, it is impossible to obtain a complete picture of the crypto trading market without taking DEXs into consideration.
A significant advantage will be gained by the CEXs that can figure out how to incorporate DEX price discovery and liquidity into their trading operations.
Decentralized exchanges are growing but lack infrastructure to scale
It is estimated that decentralized exchanges account for approximately 15% of total cryptocurrency trading volume (based on CoinMarketCap data on Feb. 16, 2021). DEX trading has been rapidly expanding, with Uniswap’s trading volume expected to surpass Coinbase’s by 2020 — an accomplishment fulfilled with only 20 employees. Today, Venus is trending alongside Binance, which, at the time of writing, is the cryptocurrency exchange with the highest 24-hour trading volume.
Professional traders may place a high value on DEXs because of the security afforded by wallet-to-wallet, or peer-to-peer, transactions. There are, however, two issues to consider. First and foremost, institutional traders are unable to trade on DEXs unless they have completed counterparty KYC. Second, the public chain technology that underpins DEXs is both slower and more expensive than the technology that underpins exchange trading.
DEXs that are faster, have lower fees, and have robust KYC procedures will be required by institutional investors. In order to attract institutional traders, a DEX must be built on a blockchain that is both faster and less expensive.
There are no true centralized exchanges — only brokers
In order to further complicate matters, today’s cryptocurrency exchanges operate more like regional brokers than true global exchanges.
For example, consider the differences and similarities between trading Apple (AAPL) on E-Trade and trading Bitcoin (BTC) on Coinbase.
A professional trader in the United States seeking to trade BTC via Coinbase has access to only a small portion of the global market.
Coinbase’s BTC/USD order book is solely responsible for price discovery and liquidity.
Over 97% of the world’s supply, demand, price discovery, and liquidity are accessible only through hundreds of other exchanges.
To summarize, the following table compares selling Apple on E-Trade to selling Bitcoin on Coinbase:
- E-Trade executes orders on Nasdaq, which accounts for nearly all AAPL spot trades.
- Coinbase executes orders through its own order book, which currently accounts for 2.1 percent of global trades.
There is no truly global cryptocurrency trading market; instead, hundreds of smaller, regional markets exist.
Consider the possibility of AAPL trading on 300+ different exchanges, each with its own set of buyers and sellers.
This is the state of the global cryptocurrency market at the moment.
There are two issues with this.
To begin, trading on a CEX eliminates many of the benefits associated with decentralized assets.
Second, crypto trading is segmented into hundreds of distinct trading “lakes” — each with its own local supply and demand of fiat and crypto.
A cryptocurrency’s decentralization ensures that no single entity has complete control over it.
When users deposit funds in centralized exchanges that manage token listing privileges, custodianship, order matching and execution, and brokerage services, they relinquish significant control.
This concentration of power poses security and compliance risks, prompting market criticism.
Indeed, traders in Asia–Pacific have launched several coin withdrawal campaigns to demonstrate their opposition to CEX trading.
As evidenced by the recent retail shorting war in the United States, the younger generation is opposed to centralized power and courageous in challenging it.
Centralized exchanges are also severely restricted in their access to the global market.
Exchanges such as Coinbase and Gemini accept users from a limited region (the United States only) and offer a limited number of fiat currency trading pairs (the United States dollar only), in contrast to E-Trade, which provides its traders with access to a diverse range of exchanges, equities, and exchange-traded funds.
By contrast, CEXs close their doors to all others, severely limiting price discovery and liquidity, resulting in wider spreads, lower fill rates, increased slippage, and inefficient markets in general.
The concept of Best Bid and Offer does not yet exist in the cryptocurrency world, as Coinbase’s BBO is distinct from those of Gemini, Binance, and Huobi.
Professional traders are underserved
From the perspective of professional traders, the market maturity and global trading capabilities that are required have not yet been developed in sufficient quantities.
The segmentation of the cryptocurrency trading market is still in its infancy, and the needs of professional traders are far from being met because: (1) they are unable to efficiently access a global market; (2) they are unable to access the best prices in a global market; and (3) they are unable to access institutional-grade liquidity in the cryptocurrency trading market.
Furthermore, because of the absence of Know Your Customer (KYC) checks during onboarding, DEX trading is not yet viable for institutional traders.
But the average Uniswap trader is far more active than the average trader.
Users of Uniswap are completely on-chain, open, and transparent, and its 300,000 users trade more than Coinbase’s 35 million users, according to the latter’s claims.
The result is that there is a thriving market for whales trading outside of centralized exchanges, completely debunking the widely held belief in the financial community that users of Uniswap and DEX are primarily retail investors.
There is no trading market that provides true global coverage, and retail and institutional traders are unable to gain access to a truly global trading environment.
Furthermore, there is no trading market that offers DEX trading at an institutional level.
Asset digitization will drive growth
The general consensus in the industry is that the continued digitization of assets is unavoidable.
Cryptocurrency tokens such as Bitcoin (BTC) and Ether (ETH) are blockchain-native, and they account for the majority of the trading volume in the current cryptocurrency trading market.
Despite this, the cryptocurrency market capitalization is less than half that of Apple.
When compared to the untapped digitized asset market, the stock market is practically insignificant.
While there is a lot of potential, it is still too early to predict how things will turn out.
Many exchanges expose traders to compliance risks
Some of the world’s most prestigious exchanges allow traders to trade in a large number of contentious tokens.
Anti-Money Laundering regulations on many exchanges are not sufficiently stringent.
In spite of the fact that they claim to have licenses in some countries, it is difficult to imagine how they could be in compliance with the law if they offered derivatives trading to users all over the world while using an exchange license from a single country.
Because of these compliance risks, some exchanges’ ability to maintain their competitive positions is jeopardized. For example, after BitMEX was indicted, the derivatives market landscape changed dramatically and quickly, leading to users leaving and trading volume declining.
At this time, there is limited availability of innovative institutional-grade exchange technologies.
The volume rankings tell the story of today.
Those trading markets that provide true, global Best Bid and Offer price discovery, institutional access to DEX pricing and liquidity, and the ability to execute global trading strategies on a single platform will be the ones that tell tomorrow’s story.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of CoinNewsDaily.