Crypto Exchanges

The idea of cryptocurrency has evolved and transformed over the last decade and in response to this advancement, the market has witnessed the emergence of crypto exchanges pop up all around the world. With over 500 exchanges and growing to trade through, it’s become increasingly valuable to understand the key pieces of news and information which differentiates the sharks from the minnows. Here’s a look at the good, the bad, and everything in between when it comes to cryptocurrency exchanges over recent years.

Exchange Overview

An exchange is a platform where you can, for lack of better terms, exchange one type of currency for another. This is where folks are able to trade fiat for crypto coins or tokens and vice versa. Of course, most online exchanges will incur a fee with each transaction that you make, so be aware of these small yet tedious payments which could influence the goals you set.

When looking through exchanges you’ll discover what are called pairs, indicated by the abbreviations of one currency next to another (ABC/XYZ). This shows people that you can buy or sell one currency (ABC) for the other (XYZ). To fully execute a trade, you will need to place an order which is basically your instructions for the trade transaction. One way that whales use exchanges to move markets is by setting up buy & sell walls. A wall is essentially a large order — for a buy or a sell — placed by someone usually seeking to dump or buy coins at their preferred price.

There are a few different types of exchanges to work with. The most common being the traditional online middleman service. Depending on the exchange, people can trade fiat or altcoins for any other listed asset. Although it is also possible to exchange cryptocurrencies directly with other individuals through peer-to-peer exchanges, most people use online platforms where traders buy and sell based on the current market prices. Coinbase is one of the most popular online exchanges in existence, with over 13 million users worldwide. As the number of exchanges rapidly increased over the last year, an unprecedented number of users were being added into the crypto world each day. This is a result of growing popularity, further emphasizing the importance of keeping up with the news around exchanges.

So, What’s Been Happening?

It sucks, but a majority of the news around crypto exchanges in our newsfeed highlights the negative aspects of online exchange platforms — namely hacking and security vulnerabilities. Unless the market is in the process of imploding, it seems like we can’t go a single month without reading about some hacker(s) who managed to steal millions of dollars worth of cryptocurrency from an exchange. Just last week hackers stole $23.5 million from Bancor, a crypto company which functions as a decentralized exchange service.

Network security has significantly improved since 2014 following the largest cryptocurrency hack of the Mt. Gox exchange which lost more than $460 million. Since then, we have seen many large exchanges deal with security breaches and inside jobs. In fact, these breaches have been adding up lately contributing to a total value in losses passing $2.3 billion.

An in-depth analysis of these security breaches further reveals that hacking is not uncommon in the cryptocurrency world, where there’s been at least one hack per month over the past year. With hacks on the rise, a notable concern regarding exchanges has to be their susceptibility to network security breaches. When determining which exchange(s) you want to use, it’s absolutely critical that you know who is behind the project as well as its general history. Just like you would when approaching any other investment, you must DYOR into the platform and minimize the chances of potentially losing your stored assets.

Why should you care about hacking even if you don’t keep your coins on an exchange? Well, because you can still feel the impact of a significant breach through an indirect price drop in cryptocurrency markets. It’s not a coincidence that coin prices drop right after a hacking incident. This phenomena is generally seen as a cause and effect correlation. We’ve seen it before, when BTC’s price dropped as a reaction to a network breach leading to millions of dollars in losses for the exchange. Keep in mind that a hack can happen at any time and by using an exchange, you are aware of, and accept, the associated risk.

Wait, It Hasn’t All Been Bad

Despite the seemingly endless stream of negative reports claiming to have exposed the vulnerability of crypto exchanges forever, there’s also been a fair amount of positive news surfacing thanks to the effectiveness of some exchanges. Since the Mt. Gox hack, many, many exchange platforms have emerged, attempting to diversify the trading market. The market is split between several giants and several smaller platforms which gives trading access to nearly everyone in the world.

When checking out the lists of available exchanges on websites like coinmarketcap.com, you’ll soon notice that some of them have a large variety of coins to offer while others only have a handful. As such, many people stick to one platform when beginning their crypto journey. Once someone gains more experience, they may feel comfortable opening more wallets and utilizing more exchanges in order to trade an assortment of altcoins. Where do exchanges like Binance and Bitfinex fit in? Both are providing many more altcoins to trade with so these competitors have incentivized their exchanges to continuously provide the highest quality of services to differentiate their network as much as possible.

Exchanges have also made transactions much cheaper and faster by developing and utilizing new technology and software updates. One software in particular, SegWit, has been adopted by many of the top exchanges including Coinbase and Bitfinex. Ethereum bull, Benjamin Roberts stated that the software update is a good long-term sign for Bitcoin and crypto exchanges. This software is utilized as a scaling solution for BTC, not as an overall scaling solution for other cryptocurrencies. As more exchanges enter the space, the pressure is on for current giants to keep their edge by maintaining their efficiency.

One such exchange that offers a different trading option is Kraken. This exchange offers what’s called leveraged trading, basically allowing you to trade with more money than you’ve deposited. This might already serve as a red flag for many traders who know just how dangerous playing with “borrowed” money might be. You can make money pretty fast, but you can lose it even faster… ending up owing the platform money by the end of it all. Yet, this service attracts many traders to their platform and has been integral to its growth. It may work for you, but it is not for everyone.

The possibility of arbitrage trading has become a reality over the last several years thanks to the emergence of many online exchanges. Using arbitrage trading, users can transfer assets to different exchanges that have higher sell prices to make quick returns.

When they aren’t being hacked or losing millions of dollars via security breaches, cryptocurrency exchange platforms have actually been incredibly impactful. They’ve pushed each other to develop cutting edge technology and create some of the most powerful software we’ve ever seen. For traders, exchanges can play pivotal roles in how we execute and profit from trades. Moving forward, keep your eye on news of exchanges because you never know how it might affect you.

Are there enough exchanges already? Should there be more? Let us know in the comments!