Understanding five major issues that the current crypto exchanges face:
The cryptocurrency exchanges serve as a platform for the Crypto enthusiast in order to carry out their transactions using their cryptocurrencies. It provides a service to its customers to exchange their traditional assets such as Fiat currency or any other asset into the cryptocurrency and vice versa. Most of the cryptocurrency exchanges operate from outside the western countries in order to prevent the regulations that can be imposed by the financial authority is of the country but ironically they operate mostly on the currencies of the Western countries only. For a certain amount of cryptocurrency or digital currency, the cryptocurrency exchanges may accept payment in the form of credit cards, wire transfer or any other form of payment.
As of 2018 most of the financial authorities of various countries remain unclear about the categorization and jurisdiction of the cryptocurrency space along with the cryptocurrency exchanges. As of March 2018, reported by Bloomberg, Binance, which is operating from Hong Kong is the largest cryptocurrency exchange.
Making a profit in the cryptocurrency space has been enabled and powered by the cryptocurrency exchanges. Imagine day trading and making profits without the cryptocurrency exchanges. In other words, the whole cryptocurrency space is revolving around the cryptocurrency exchanges and hence they must maintain it’s sanity. Most of the cryptocurrency exchanges Around The World are highly equipped and handle huge amounts of daily transactions and the market never closes.
However, there are certain drawbacks and pitfalls that the cryptocurrency exchanges are yet to overcome:
Lack of liquidity is the major problems among the various cryptocurrency exchanges as the market itself is so new and volatile making it difficult to exit and the right time price. The fact is not being denied that the trade volume has been increasing with more number of users using the cryptocurrency exchange but that is not bringing in the desired effect. For an instance, in the Bitcoin market, the lack of liquidity is caused by the Bitcoin holders who are holding their Bitcoins in order to gain profit from it as its value rises.
And many other uses are holding onto the Crypto until it reaches a certain level of profit. Due to this, we are experiencing huge market price swings and higher volatility which subsequently is flooding the market.
This is the point of time where the future markets come into the picture. They provide provisions of selling the cryptocurrencies which are not actually held by the seller but are only contracted to be sold, which are bought at lower prices after some time. This might bring some kind of stability into the cryptocurrency market. Also, the price slippage in the cryptocurrency exchanges is caused by them when the users are made to wait for several minutes in order for their transactions to get confirmed.
The lack of liquidity results in two major problems in the cryptocurrency exchanges. Due to the lower number of buildings on the cryptocurrency market which is thin large spreads on the thin market is bound to happen along with the inefficiencies caused by the difference in the demand and supply. Secondly, the price slippage due to the highly fluctuating cryptocurrency market and hence the trades do not occur at the expected price.
2. Centralised nature
The cryptocurrency exchanges centralized major in a sense that they are completely owned by the single authority and operated and maintained at a single place and hence become an easier target for the hackers. The best example for the centralized failure of a cryptocurrency exchange was Mt. Gox where almost 650,000 Bitcoins were stolen and resulted in the largest cryptocurrency hack of all time which also later file for bankruptcy.
Another similar hack occurred at the cryptocurrency exchange Bitfinex where almost 120000 Bitcoins were stolen. Also, the immutable nature of the blockchain technology makes the transactions is revocable.
3. Clearing and settlements
Since the cryptocurrency space is still regulated in many of the countries the Clearing and settlement channels are subjected to high risk. Cryptocurrency exchanges, on the other hand, are acting nothing but as a medium between the buyer and seller.
4. Lack of technology capabilities
According to some of the business analyst the current technology that the cryptocurrency exchanges are incorporating with reference to the amount of trading volume they handle, doesn’t match.
The analysis of the opinion that it might cost almost 10 million USD in order to build and operate a technological setup for a cryptocurrency exchange. the better the technology in cryptocurrency exchanges uses, the lesser it is susceptible to the fraudulent activities and market manipulations.
5. Future of crypto exchanges
Many of the experts believe and are taking steps in order to create a decentralized cryptocurrency exchange itself. However, one must weigh the consequences of a decentralized cryptocurrency exchange. Will that be able to handle large trading volumes and also clearing transactions which require verification by the cryptocurrency exchange.