This week’s newsletter features an article by our very own Matthew Meeko. It’s called “Crypto Exchanges are the New Frontier of Information Technology,” and it looks at how the technology behind cryptocurrency exchanges has the potential to radically change the way we handle financial transactions.

The crypto market is a globalized market, but at the same time it is not. Investors in countries like ours can’t view the price of any alt-coin from anywhere else in the world. You’d think that this wouldn’t be a big deal, but it is. The crypto market is a global market, but there are thousands of different exchanges that have to give pricing information to their users, and they all use different methods for calculating that price. There are a number of work-arounds. One is to use multiple exchanges, or even to create a private exchange chain. Another is to simply use a different exchange that gives you a localized view of the market. Those are two of the more practical solutions, but they only work

Cryptocurrency is a disruptive technology that has reshaped finance, payments, and commerce. Yet, the financial landscape is fragmented between thousands of competing exchanges. This lack of adherence to a single global price means that buying and selling coins can be very confusing and, in turn, alienating for a newbie.. Read more about cryptocurrency news and let us know what you think.

The biggest challenge for crypto exchanges is global price fragmentation

 

It’s no secret that Coinbase has been a key player in attracting new customers to the cryptocurrency industry. Coinbase’s user-friendly onboarding procedure and position as a publicly listed business make it seem to non-crypto aware investors as a more conventional investing platform, resulting in increased confidence.

However, it seems that a new story regarding Coinbase and its exorbitant fees for consumers and professional traders and investors appears on the internet nearly weekly. The problem usually starts with a price comparison between a few different exchangers. With more competition, the pressure on Coinbase and other exchanges to reduce costs is increasing. Nonetheless, the most serious price problem confronting Coinbase and other exchanges goes well beyond fee structures.

Price and commoditization

Fungible items are referred to as commodities. To put it another way, the market regards commodities in all of their forms as essentially equal. When a product or service becomes commoditized, there is no longer any difference between vendors, and all bargaining is solely focused on price.

The idea that the price of cryptocurrencies is constant across all exchanges — that they are commodities — is at the core of the debate about trading fees. Trading costs would be the sole problem if Bitcoin (BTC) were a genuine commodity, and the debate about Coinbase’s fee structure would be justified.

Cryptocurrency requires a decentralized daily reference rate.

However, this perspective on Bitcoin conceals an underlying issue in the market. Bitcoin’s price isn’t set in stone and may fluctuate widely across exchanges. Consumers are often overpaying or underpaying without even realizing it due to market fragmentation.

Fragmentation and the real cost

When there is a lack of communication and interaction between exchanges, market fragmentation develops. As a consequence, there are price discrepancies across exchanges and a lack of liquidity in the market as a whole.

When these pricing differences are significant, any differences in costs across exchanges are quickly subsumed. Investors and traders have been taught to look at just one exchange’s price. However, because of this fragmentation, the actual price of any cryptocurrency is the price on a single exchange plus fees, as opposed to the same calculation on another exchange.

Related: In the trustless world of cryptocurrencies, trust is still required

Whether one exchange’s Bitcoin price is very low, it doesn’t matter if that exchange has no fees. Why?

If the price of Bitcoin is $60,000 and the charge is 0.50 percent on one exchange, a Bitcoin may be purchased for $60,120 with a 0.30 percent fee on another exchange. Yes, with hundreds of exchangers in the market, the price disparity may sometimes be this large. This disparity has resulted in an increase in arbitrage investing, which involves purchasing Bitcoin on one exchange at a cheaper cost and then reselling the same coins at a higher rate following a transfer to another exchange.

However, the greatest problem this creates is that Bitcoin is no longer a commodity. Bitcoin becomes nonfungible when there are too many price variations, and the market becomes stagnant. This move away from commoditization may lead to a market collapse in the future. However, there is reason to believe that things will improve.

Stabilization of the market

This kind of market turbulence isn’t new, and it’s not exclusive to the bitcoin market. The same problems have arisen in the bond and equity markets, but they have been resolved via regulation over time. The Securities and Exchange Commission of the United States, for example, has a policy known as National Best Bid and Offer, or NBBO. When an investor wants to purchase a securities, this law requires all brokers to execute transactions at the best available ask price in the country, and when an investor wants to sell, this legislation requires all brokers to execute trades at the best available bid price in the country.

The regulation stabilizes the market and prevents customers from overpaying on any particular exchange in this manner. Brokers are reined in, and market forces operate together rather than independently.

The cryptocurrency market, on the other hand, does not experience this period of normalization since it is still in its infancy. Because of the market’s present fragmentation, individual and institutional investors frequently pay different rates depending on these exchanges.

The difficulties in implementing this structure in the bitcoin market are numerous: a lack of communication, stringent regulatory compliance, and dry liquidity pools are all preventing any significant change.

Creating a worldwide crypto market that is genuinely united

The problem in the market stems from a lack of communication or interoperability across exchanges, resulting in a high level of market fragmentation. The existing digital infrastructure, on the other hand, is sufficient to enable continuous interchange contact. However, for markets to grow internationally, exchange interoperability must be smooth.

Blockchain interoperability may be aided via trustless bridges.

Bitcoin, maybe even more than Apple or Tesla shares, is a worldwide asset. As a result, it’s unfair that traders can’t always obtain the best bid and offer, as the NBBO does for conventional stocks. Digital asset trading will also benefit from more enterprise-grade technology and liquidity. All of this may lead to the creation of a single worldwide trading market, similar to how conventional equities are traded on exchanges such as the Nasdaq or the NYSE.

Trading charge arguments and discussions are misguided and do not convey the whole picture without these measures to decrease fragmentation. With the proper legislation and technology in place, it’s time to level the playing field of fairness. It’s not a competition for reduced trading costs in the end; it’s a race towards something like to the NBBO in crypto: a genuinely global best bid and offer.

There is no financial advice or suggestion in this article. Every investing and trading choice has risk, and readers should do their own due diligence before making a decision.

The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.

Apifiny, a worldwide liquidity and financial value transfer network, is led by Haohan Xu. Prior to joining Apifiny, Haohan was an active investor in the stock market and a digital asset dealer. Haohan graduated from Columbia University with a bachelor’s degree in operations research and a minor in computer technology.

Crypto exchanges around the world are facing challenges to their business models that do not support the overall market needs. For example, a crypto exchange can lose its competitive edge if the price of a crypto token is too expensive or too cheap. This has been seen in the past, and it has led to the inevitable death of several crypto exchanges.. Read more about biggest problem with cryptocurrency and let us know what you think.

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