Big competition has cryptocurrency exchanges working to stand out
How do you disrupt the disruptors? New exchanges are digging deep for a competitive edge.
The ability to seamlessly cross borders is one of the consistent features of all cryptocurrencies, and the top exchanges tend to service customers from almost every country in the world. The biggest names each pick up a significant percentage of what might be a multi-trillion dollar market in coming years, and is already well into the multi-billions.
Consider Coinbase for some perspective. It's perhaps the USA's biggest name in crypto, but its GDAX exchange is only the tenth largest by volume. Note that the trade volume figures should be taken with a grain of salt, due to evidence of wash trading to fake volume on some of the top 10.
Despite that, Coinbase still managed to have a billion-dollar revenue year in 2017, with December alone giving the company almost $500 million, all while the proportion of people touching cryptocurrency in the US was well under 10%, and the vast majority only ever traded very small amounts. Trades have slumped with crypto prices in 2018, but that hasn't stopped exchanges from predicting another bumper year in 2018.
Essentially, there's an almost incomprehensible amount of money waiting for the world's top exchanges in coming years, making it well worth fighting for a reasonable-sized piece of the pie.
The catch is that a relatively small number of exchanges might end up dominating the bulk of the pie. The borderless nature of the technology means one business can serve the entire world, especially once more unified international regulations start developing, while high volume itself is a major competitive advantage for exchanges in the form of deeper liquidity and therefore a better product.
For exchanges entering the market these days, getting an extremely strong product ASAP is essential to eventually get that piece of the pie. And in this market, low or no fees, tight security and an exceptional technical foundation are the norm. To get ahead and then stay ahead, an exchange needs to invest big and get creative. And with so much money at stake, it's well worth it.
Binance: Staying at number one.
Binance is widely regarded as the world's number one cryptocurrency exchange. It has the world's highest trade volume, without the accusations of clear wash trading that have hit some of the other high-volume platforms. Its trading fees are a hard-to-beat 0.1% (with ways of reducing them further) and it has, somewhat incidentally, developed a reputation for extreme competence in the face of relentless hack attempts which speaks well of its security.
At a certain point, it's hard to keep improving on core elements like fees and customer service, so it's started looking laterally.
One of its main limitations is that it's a cryptocurrency-only exchange, and doesn't yet offer direct trades for fiat currencies like USD to cryptocurrency. It aims to solve this by moving all the way to Malta.
It's also facing competition from the next generation of decentralised exchanges, which offer inherently better security by simply operating as a direct peer to peer marketplace, without needing to store assets in their own vaults. To stay ahead of the curve here, it's going as far as creating its own blockchain, with plans to operate its own decentralised counterpart alongside the existing centralised exchange.
Australia's exchange landscape
Australia has a solid range of exchanges offering cryptocurrency purchases with AUD, but not all of them hit the full list of must-have features which are needed to become a global player. One common downside is a limited number of coins available, and it can still be difficult for everyday buyers to get into some of the less-common, and arguably more promising, cryptocurrencies around.
The CoinSpot exchange has enjoyed a great deal of success by offering Australia's widest variety of coins, by a very large margin, even as its fees used to be as high as a somewhat hefty 3% on AUD purchases, or 1% on other cryptocurrency purchases. These were then dropped to 1% and 0.25% respectively, possibly because a new Australian exchange, Blockbid, announced that it would be offering 0.1% flat fees across the board right from its beta launch, scheduled for 16 April.
But where do you go from there? Australia is still a relatively small pond, and an exchange that wants to compete on the extraordinarily lucrative global market needs to start strong. Internationally, accepting AUD naturally isn't a good enough value proposition alone, while the lowest fees on the market are already at zero, with the Robinhood trading app. Obviously, that's pretty hard to beat.
An enormous prize is waiting for the top global exchanges, but becoming one of the best in such a competitive market means getting creative.
Blockbid just launched its beta release at the time of writing, and with bitcoin pushing on its tenth birthday, it doesn't have the early adopter advantage that many of the top exchanges do. It's entering an already highly-competitive market with the intention of eventually competing globally, which has led to some creative value propositions for consumers.
How to improve on 0% to 0.1% fees?
"Our trading fee of 0.1% is the same, or lower as all other major exchanges," explains Blockbid COO David Sapper, "additionally, as our commission is a flat fee, it's far less complex and complicated than other exchanges who implement commission based on trading scale."
The trading scale commission refers to varying fees based on previous 30-day trade volume, variations between maker and taker fees and other complexities which can make it difficult to predict how much one will actually be paying. An exchange might offer fees "as low as 0.01%" but in reality end up charging a hundred times that (1%) to the vast majority of its customers.
Essentially, when fees of 0% to 0.5% are the industry norm, you need to offer something on top of that to stand out from the pack. Blockbid might be hoping that the promise of flat fees does the trick.
How to prove security before launching?
Security is another pain point, and exchange robberies tend to rock the cryptocurrency world on a weekly basis. Binance, and to a degree most other top exchanges, have demonstrated their security and trustworthiness the hard way over time, but a new centralised exchange entering the market these days might not have the luxury.
The CoinCheck incident, for example, saw over $500 million worth of customer NEM go missing in one of the largest heists to date. CoinCheck was previously one of Japan's largest and most popular exchanges, but it then emerged that they had been holding customer funds in a hot (internet-connected) wallet the entire time. This meant the thieves could remotely and anonymously unlock it and make off with the funds.
Even before the CoinCheck attack, standard industry practice was to keep the vast majority – over 90% – of customer funds locked away in cold (offline) wallets at any given time. Blockbid decided to go one step further by using multi-signature cold storage wallets.
Much like the old movie trope of needing two keys, turned simultaneously, to unlock a vault, multisignature cold storage wallets mean one person can't unlock customer funds by themselves. This would have been a good move for India's CoinSecure exchange, which recently lost $3.5 million of customer funds, and suspects it was stolen by the company's own head of security. There's a reason cold storage, and to a somewhat lesser extent multisignature wallets, have become an industry security standard.
A much less common security measure is a business insurance policy that covers customer digital assets. Even ransomware insurance, and cyber liability insurance for breaches of customer data, are relatively new and hard-to-find products. Finding an insurer to cover a varying-sized trove of potentially hundreds of millions of dollars of crypto, might be extremely difficult and expensive.
"We are the only exchange to offer an insurance policy, which adds another layer of protection to traders that has not been seen before," Sapper said. "All cryptocurrency assets are insured against potential cybersecurity threats, and all funds are secured by multi-signature wallets."
It's still rare for exchanges to insure customer assets, but it's probably not entirely accurate to say that Blockbid is the only exchange to do so. Coinbase, for example, also insures its customer assets, but only the less-than-2% that's being held in a hot wallet at any given time. Gemini also has insurance, but it only protects against internal malfeasance.
If Blockbid has a policy to comprehensively cover 100% of customer digital assets at any given time, then that would almost certainly be a world first. Even with premiums reduced by countermeasures like multisignature cold storage wallets, it might still be a significant investment, but one that it apparently reckons is worth it.
Quality or quantity?
According to Sapper, there are only four exchanges in the world which offer more than 100 different coins, while the vast majority only offer between 2 and 50. This might be one of the few areas where an exchange can stand out without getting too creative.
"Blockbid will have the largest number of cryptocurrencies available for trade," Sapper said. "Most other exchanges only offer between 2 to 50 cryptocurrencies, with only four exchanges offering 100+ coins for trading. [Blockbid has] over 150 cryptocurrencies confirmed and scheduled to go live and a strategy to list all coins from Coin Market Cap over a period of time."
It takes time and money to implement new coin listings, especially when they use unique technical architecture rather than just sticking to ERC20 (Ethereum) or bitcoin standards, which has seen most other exchanges favouring a more discerning approach.
Binance, for example, estimates that it turns down over 97% of coin applicants while Coinbase has published a "digital asset framework" (PDF download link) which outlines a fairly strict set of criteria for new coin listings.
Blockbid, by contrast, aims to stand out through sheer variety. This will naturally lead to a lot of downright terrible coin listings, including some probable scam tokens. But these tend to creep onto major exchanges anyway, and it's arguably safer not to give users the impression that every available token has been vetted.
Either way, Blockbid seems to believe it's worth it for a slice of the global cryptocurrency exchange pie.
Blockbid exchange review
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO