Are All Crypto Exchanges Pretty Much The Same?
By William Freedman - Member of FinTech Connector / New York
No, but the SEO model says I have to add another 1,200 words or no one will ever see this. So why don’t we look at what makes them different – and what might make some qualitatively better than others.
What makes some different
Coin pairs. As bitcoin’s market share continues to decline – although it’ll be years before it’s no longer the best-capitalized cryptocurrency by a mile – selecting an exchange that deals in a broader array of coins will become increasingly important. Just as important: making sure you can exchange whatever digital assets you have for the fiat currency you need. Binance has historically set the pace for adopting new tokens to trade.
Security. According to Aziz from MasterTheCrypto, “[t]he level and type of security mechanisms employed by an exchange is vital in ensuring that your coins are safe.” He notes that holding assets offline in cold storage, offering two-factor authentication and using encrypted email to verify each transaction are ways that some exchanges demonstrate that they take your security seriously.
Fees. Exchanges can get you coming and going with so-called “maker” and “taker” charges, although many have shifted most or all of the burden to the taker side. Full transaction charges range anywhere from 0.038% for Coinfloor to 0.86% for BitBay, according to BitcoinWiki.
What makes some better
True disintermediation. Fees will continue to be a race to the bottom as long as exchanges continue to be largely undifferentiated. But what if someone comes up with another model? One point of light on the horizon is BQT, for “Better, Quicker, Transparent,” which presents itself as a true peer-to-peer platform, so you are trading with a specific counterparty rather than with a pool of potential counterparties aggregated by the exchange.
“P2P exchanges like ours carry one unique advantage: you deal with an actual person on the other end of the deal,” BQT chief executive Edward W. Mandel tells me. “This decentralized approach – which was the whole reason to adopt crypto in the first place – provides the flexibility to negotiate trades one-on-one, then rate and share your trading experience, so that you and everyone else knows the reputation of each of your potential counterparties.”
Exchange rates. Fees are only part of the transaction cost, and probably not the biggest. Where the exchanges most likely make the biggest chunk of their income is through arbitrage. In two readings taken via CNBC nine seconds apart on July 27, bitcoin was trading at $8,234 on Bitfinex and $8,219 on Coinbase. This is one of those problems that’ll solve itself as the market gets thicker, but there’s currently a huge opportunity for cryptocurrency aggregators to simultaneously buy and sell these coins, making a risk-free $15 for every BTC they churn. We, as small, retail traders, are subsidizing this behavior with another 0.2% tacked on in shadow fees.
Customer Service. It’s telling that, of all the exchanges ranked by BitcoinWiki, none of them had particularly strong ratings. Customer service in this market is seriously lagging. Whoever solves this is going to have a serious leg up when crypto adoption goes mainstream.
Liquidity. These exchanges only work if you can get your money out as fast as you were able to put it in. So here are three metrics to consider: 1) value of all assets held at the exchange, 2) value of transactions over the past 30 days and 3) number of accounts at the exchange. Take all three together as a dashboard, because any of them can be manipulated or easily misinterpreted. It’s very likely, for example, that the number of accounts on an exchange will be a multiple of the actual number of individuals trading there.
Ease of use. Over the past year, user experience has become a more integral part of how exchanges compete for new crypto participants. By all accounts, it started when KuCoin came out of South Korea with its flashy color scheme, trading competitions and easy-to-follow pairing tables.
Do you really need a wallet?
No. At least, that’s my opinion, and I’m talking about just for now. I expect to revisit this position over the next few months. And here’s what I’m looking for: Can I pay for stuff with digital coins at point-of-sale? Apple Wallet, Google Pay Send and other passbook apps are incredibly convenient, but they haven’t moved far beyond the initial wave of adopters. Your mom isn’t using them to pay at the Dress Barn counter. You’re probably not using them to pay your electric bill online.
I proceed from the premise that cryptocurrency is here to stay and will be used with increasing frequency by more people for more transactions. Given that, then, I believe one of three things is bound to happen:
- Wallet apps will become more broadly used, and allow you to use coins to pay.
- Blockchain-native passbook dapps will be developed by independent project teams, leapfrogging over legacy wallet apps, and combining near-field communication, ecommerce and distributed ledger technology to create something new.
- Exchange sites will forward-integrate into the passbook space and develop those dapps in-house.
Until that’s sorted out, though, I don’t see a need to have a wallet if all I’m doing is parking my money there until I’m ready to exchange it. Might as well just keep it in my account at the exchange.
But watch this space. I think a lot is going to happen over the course of 2018 that’ll make buying and selling goods and services via crypto a daily activity for normal people – and Your Humble Correspondent looks forward to relating the story to you.
William Freedman is a New York-based fintech writer. He serves as an advisor, consultant or content provider to BQT, Collective Wisdom Technologies, Exsulcoin, goTRG, IOU, OpenGift, SharEstates and others, engaging in white paper/business plan composition, media strategy and web content creation. He blogs about blockchain economics at https://medium.com/@WilliamFreedman and holds an MBA in international business from The American University.