The problem with Crypto Exchanges

Over the last three or four years a large number of cryptocurrency exchanges have appeared, mainly in the United States and South Korea. These exchanges allow holders of cryptocurrency to trade it for other coins or even in a limited number of cases, fiat currency i.e. real money.

Up until recently the existence of these exchanges would have been known to a limited number of people. With the crypto boom of recent months however the names and merits of these exchanges have become known to a much wider audience.

With much more awareness of cryptocurrency and much greater demand for it, the volume of requests for access to these exchanges has at times overwhelmed them. This is from both a technical point of view and an operational one.

Many users have complained of delays in getting their accounts verified and sometimes trading in certain currencies is completely suspended as demand simply cannot be met technically. This problem is not consistent across exchanges; some are performing better, others much worse.

Whats going wrong?

1. Resilience

The main issue with a number of the larger cryptocurrency exchanges is resilience. This is a buzz word across a wide variety of organizations at present. The underlying infrastructure at a lot of exchanges is simply inadequate for the demands now placed on them. This is, as noted previously, both technical and operational.

From a technical point of view the server capacity is simply inadequate at a lot of exchanges. At times they can be slowed by the sheer volume of users browsing the sites and managing their accounts never mind trading activity.

The capacity allocated to certain coins can prove totally inadequate as the market moves far more quickly than the underlying infrastructure.

Moves are afoot at all major exchanges to enhance this aspect of its offering but progress has been slow. It will be a number of months before real progress has been made.

One area of weakness that should have been improved by now is however operational. The time it is taking at some exchanges to verify accounts, a simple process, is simply unacceptable. This requires hiring humans with a basic level of education. It should not be difficult and it’s a major weakness in the current crop of exchanges.

2. Transparency

The exchanges dictate the price for certain coins. The pricing methodologies used should be much more transparent. How in a global market can one exchange have a price for a currency which is up to 30% higher than the same coin on another exchange?

Surely investors would simply trade the same coin between exchanges multiple times a day and reap huge profits?

How prices are determined is key and it would be beneficial if all exchanges would disclose the number buys and sells conducted on their exchanges each day and at what price. Independent verification here would be even more welcome.

Some of the volatility in the market appears to be due to intra-exchange pricing differences on cryptocurrency exchanges and not trading activity. Reducing this through greater transparency would be very welcome.

3. Liquidity

At present it is still difficult to trade most of the top 10 cryptocurrencies for fiat currency. The currencies which you can trade for fiat today have been the same ones which have been trade able for fiat for a long time.

This doesn’t make sense any more as the trading volumes in other currencies over a long period are now much larger than they have been historically with much greater liquidity. Monero in particular, surely warrants more exchanges expanding to allow it be traded for fiat.

This lack of cryto fiat pairs has other undesirable affects. If you have to buy say BTC with another coin and then sell that BTC for fiat in order to cash out an important question must be asked. How much of the current BTC price is driven by people using it as a temporary means to cash out? What does this say about its future prospects and use?

Increased fiat crypto pairings would be welcome.

The list above is just a short list but it aims to help with the main problems. In recent days increased regulation of exchanges at a minimum looks inevitable. This gives exchanges the opportunity to try to address the issues above as part of any regulatory driven updates.

This will improve user experience but also offers the opportunity to ensure that the current exchanges have a long term future in their current format.