Exchanges that facilitate trading are an integral part of the crypto industry. Without platforms like Coinbase and CEX, investors would not be able to reliably trade their beloved Bitcoin, Ethereum, or Ripple. Exchange services may deal with both fiats and crypto or only with the latter, they also can have mobile app versions to make the processes more flexible.
Exchanges keep the circulation of cryptocurrencies moving – people use them to invest their fiat money and purchase coins. Analyzing the market, crypto enthusiasts try to make profits on buying promising coins and selling them when the price goes up.
As they deal with a highly innovative and volatile industry, cryptoсurrency exchange platforms face numerous problems. Even the most reliable and reputable services have to overcome some barriers – let’s look at the five major ones.
Security is hugely important for any online business. The internet is full of hackers and cybercriminals. Exchanges’ customers have to be confident that they won’t lose money or personal data if systems are breached.
We have witnessed several large-scale attacks in the past. For example, the platform Bitfinex was hacked which resulted in a loss of 120,000 BTC. Furthermore, who can forget the legendary Mt. Gox case of losing 650,000 BTC. It’s clear that exchanges must invest in the latest security technology and keep up to date with the latest hacking trends.
If compared to traditional Forex trading and other financial markets, cryptocurrency exchanges typically have rather poor liquidity. And liquidity ensures that the service has enough reserve funds to meet customers’ demands.
This problem is compounded for smaller exchanges that don’t have the same level of financial stability as larger ones. They may struggle to meet orders or even run out of coins to sell. Furthermore, their lack of liquidity may cause higher transaction fees, which may turn customers away.
Liquidity is one of the major factors along with the market capitalization. While the crypto space is evolving and a lot of websites are getting better in terms of liquidity, this is still a huge barrier. An exchange must actively manage it and ensure that it can run a smooth service without limitations.
Cryptocurrency pairs supply
The idea of trading is that you purchase one currency in return for another, for example, Bitcoin for Ethereum. An exchange must provide all of the common crypto pairs such as Bitcoin, Ripple, Ethereum, and Bitcoin Cash. Also, any platform should consider adding new promising coins at a good hour.
There are crypto-only exchanges that don’t support fiats – they are suitable for those who already have some coins and want to make profits on trading. The biggest exchanges that are targeted at newcomers among others must allow buying crypto with fiat currencies. Usually, only a few fiats are accepted, which may be a barrier for people who live outside the USD or EUR zone and want to make an investment using their national currencies.
Any crypto-related website or blog will also tell you that another important factor for crypto-fiat services to consider is a number of payment options. The more of them are available, the better. Cards support, banks transfers, payment systems integration – these are the indicators of a good exchange.
Most exchanges will charge some form of trading fees, which cover operating costs (utilities, web hosting, and database management). It is a necessity – if exchanges operated with no commission, they simply couldn’t provide any reliable service.
The cryptocurrency market is highly competitive. We have a plethora of platforms with similar offerings. It’s clear that customers will mostly turn to the exchange that charges the lower transaction fee.
Crypto exchanges must fine-tune their trading fees and analyze them continually. It’s generally a good idea to implement VIP programs and offer some discounts – for instance, Binance lowers the commission for using their native coin.
Keeping up with current trends
The cryptocurrency industry is moving at a lightning fast pace – not a day goes by without a new ICO entering the market. Furthermore, it’s highly volatile. The dramatic rise and fall of Bitcoin prices (from highs of $19,000 to $5,500) shows the state of the whole market, and most of the altcoins were experiencing the same price fluctuations.
Exchanges must stay ahead of price trends and also keep up to date with new currencies. By offering unique features or implementing a brand new technology, a platform could easily overcome competitors and gain more support and popularity. A proper marketing strategy should also be taken into consideration.
As we can see, running a crypto exchange is not a smooth and easy process. As the industry is highly unpredictable and attractive to scammers and hackers, constantly updating the service, reconsidering the offerings, and improving security measures are things of vital importance. As time progresses, exchanges will learn to overcome major barriers, but at the moment, they suffer from low liquidity and harsh competition.