Developing A Deeper Understanding of Cryptocurrency Exchanges
Is your company considering investing in or partnering with a cryptocurrency exchange? This is currently a hot business model, and you may be approached by up-and-coming or established exchanges seeking funding and new partnerships. In order to make an educated decision, it helps to have a clear understanding of what a cryptocurrency exchange is, and perhaps more importantly, what makes for a good crypto exchange.
What is a cryptocurrency exchange?
Quite simply, a cryptocurrency exchange is a platform which allows for the buying, selling, and trading of crypto assets. One can use an exchange for simple, practical purposes, swapping out one sort of asset for another more usable asset, or one can trade it like the stock market, using techniques such as day trading and scalping.
Depending on their business plan and the niche they seek to serve in the market, an exchange may list only a handful of the most popular and well-established cryptocurrencies (such as bitcoin and ethereum), or they may actively court new projects in order to provide a list of hundreds of so-called “alt coins.”
How do you find a good crypto exchange?
At Cointelligence, we’re dedicated to providing valuable data to people in the crypto economy, whether they’re hardcore early adopters or newcomers just dipping their toes in the water for the first time. We identified a clear need in the market for a cryptocurrency exchange rating system that was fair, impartial, and based on multiple metrics.
The sad truth is that while exchanges are an integral part of the crypto economy, they’ve been plagued with problems practically from the start. One of the first cryptocurrency exchanges was called Mt. Gox, and if that seems like an odd name for currency exchange, that’s because it started as a site for trading Magic: The Gathering cards. The crypto industry was so new at the time that it seemed perfectly reasonable for somebody to repurpose an existing site to trade these new currencies. But from 2011- 2014, Mt. Gox was plagued with security issues that led to its eventual shutdown.
We wanted to provide a way for people to avoid today’s Mt. Gox’s and determine which cryptocurrency exchanges were the most trustworthy, so we launched an exchange rating program that rates these platforms based on metrics such as security, the quality of their team, and the ease of use. We see these ratings as the ideal starting point for anyone looking to research a crypto exchange, whether they’re looking to trade, list their alt-coin, or form a business partnership.
The entire industry has an issue with over-reporting trading volume to support inflated claims about the liquidity of their platform
The Perils of Bad Exchanges
It’s extremely important to do your due diligence when it comes to any issue involving finances, and recent issues within the crypto economy have illustrated how you can’t afford to take anyone at their word.
Together with Coinfirm, we showed that HitBTC was very likely insolvent. Together, the data from Cointelligence and Coinfirm paints a dismal picture of an exchange with an anonymous team, only $3m of cryptocurrency in reserves, and a ridiculous fee structure. And yet, people still trust them with their crypto assets! This goes to show how young this industry is -- in no other industry would you entrust your assets in a company where you couldn’t find public information about any of the C-level executives.
But it’s not just individual exchanges that are of concern. The entire industry has an issue with over-reporting trading volume to support inflated claims about the liquidity of their platform. Recently, Hacken released their own Cryptocurrency Exchange Ranks (CER) which reveal the truth behind these claims.
Don’t Act on Bad Intelligence
As a CIO, you know the importance of good intelligence. If the time comes to consider a partnership with a cryptocurrency exchange, make sure that they are operating in good faith.
The crypto economy offers a variety of opportunities for businesses, from putting your processes on the blockchain to developing your security tokens to investing in an exchange. But before you take advantage of any of these, be sure that you’re acting from a place of solid knowledge, with a clear understanding of the technology and people involved. Don’t be taken in by sparkling promises and slick attitudes -- facts will trump these any day.