Exchange Listings
The majority of new and less established projects have a “Major Centralised Exchange Listing” on their roadmaps, such as Binance or Coinbase. Listing on a centralised exchange (CEX), enables a new market to be accessed and allows the majority of crypto participants, who trade on CEXs, to access and trade their assets in an easier and more user-friendly fashion. There is substantial hype in coins that are to be listed on major exchanges with the hopes that new buyers will flood in and buy up the newly available liquidity.
Across all financial markets, information inefficiency creates and drives opportunity which is rewarded in the form of profits. The saying “buy the rumour, sell the news” exemplifies this perfectly. When new information is introduced to the market, such as rumours of an exchange listing, the event and future expected demand has not been fully priced in and therefore there should be demand following the increase in understanding of the event throughout the market.
In this article we will analyse the factors behind exchange listings, the requirements and process of coins being listed on major exchanges and finally the impact that exchange listings have on price of an asset.
Why Centralised Exchange Listings Matter
Prior to CEX listings, coins typically trade on decentralised exchanges (DEXs), such as Uniswap. Coins that are only listed on DEXs arguably present the greatest opportunities, due to higher upside potential due to the lower number of market participants trading on these platforms compared to CEXs, accompanied by the fact they have not been exposed to the untapped demand of CEXs where the majority of crypto users trade. These projects are typically also much earlier on in their product lifecycle which poses greater opportunity but also increased risks with a heightened probability of failure — DEXs are a degen’s paradise.
There are several reasons why the majority of crypto participants are not willing to trade on DEXs, the first being gas fees driven by high levels of activity on different layer 1s. In the past, this was a more prominent issue on Ethereum, where transactions could cost in excess of $100 to simply buy or sell a coin. For traders who were allocating less than $1000 per trade, the net cost of the entry to a trade was immediately increased by over 10% and the exit also added an additional $100. In some cases, this led to the net cost of the purchased coins to be 10% higher than you anticipated and would eat into your profits dramatically. This also affected risk management, with the gas fees having to be considered when determining stop losses and take profits to ensure you were net profiting.
This additional layer of complexity and calculation was also not considered by the majority of new participants who would end up spending all their ETH on gas buying dog coins. The necessity of always having $100s worth of Ethereum in your wallet was also a turn off, with investors wanting to dedicate their Ethereum to hodling or traders using it to trade for alternative assets, opposed to allocating for gas with the only prospect of it disappearing with the promise of being able to purchase a coin — and sometimes that didn’t work. Thankfully in more recent times, gas fees on Ethereum have dropped to around $10 allowing more users to trade on Uniswap and access the coins with lower market caps and greater potential upside, albeit with more risk involved. When operating on CEXs gas is not an issue with the only operational cost being exchange fees, which are typically set around 0.1% of the value of the trade. This enables smaller amounts to be traded more frequently without costs snowballing.
Another factor hindering users stepping into the degen world of DEXs, is the process of having to transfer your assets out of an onramp, such as a centralised exchange, and onto a separate wallet, such as Metamask, that are required to access decentralised applications. This involves having to take custody of your coins with the responsibility of securing your seed phrase with the risk of losing them forever if you forget them or your dog eats the receipt they were written on the back of. The responsibility and the dependence on your own security measures and their integrity puts off a substantial number of participants (Source). The process is also complex and individuals who are not crypto or tech natives can be put off and satisfied with buying the assets once they are launched on more user friendly CEXs. However, as we have seen in the past several months it is essential you have total sovereignty over your assets. As the saying goes — “Not your keys, not your coins”.
Requirements for Exchange Listings
The majority of coins will initially list on DEXs due to the simplicity of the release and the lower amount of resources required. Proceeding the listing, the majority hold their private and public sales, where they will sell the coins at a lower valuation to attract funding to stimulate development and growth prior to the token release. The next stop will be Uniswap, or another DEX, where they will supply liquidity and host their Initial DEX Offering (IDO) — the launch of the coin onto the market for all participants to buy. This process of launching on a DEX requires marketing to drive individuals and entities to invest in the token pre-launch in private and public rounds, followed by additional advertisement in the form of whitelisting opportunities typically conveyed on Telegram or Twitter requiring individuals entering to retweet and share the post of the IDO event. Whitelisting enables individuals to acquire the token at a similar price to private / public rounds. This incentivises people to share the word and raise awareness of the launch, whilst providing the opportunity for them to purchase the token at a lower price.
The requirements for CEX listings are a more complex process with one of the main necessities being the project having significant user adoption, an active community and sustained development. Every project would argue that they meet all these criteria, however the size each operation varies and CEXs require this on a large-scale. Binance’s CEO, CZ, stated in a Forbes interview that “If you have a large number of users, your product has value. That’s the easiest to measure.” A CEX listing will also cost the project substantial amounts of capital, with each exchange varying with cost. In 2018, Binance announced they will donate all listing fees to their charity “Blockchain Charity Foundation”, with projects choosing how much they pay as a donation to the charity.
CEXs will also vet potential listings to ensure their project has sufficient demand and will attract and sustain volume on their exchange, whilst also not being a complete scam and hurting the exchange’s public relations and credibility. Audits can also be completed to review the project’s code and to provide evidence of the claimed security of the token contract.
Another requirement for a CEX listing is market making services. The introduction of market makers for a coin listed on centralised exchange is what drives the increased liquidity. Market making is a necessity in financial markets to improve liquidity and to reduce the spread between the highest bid and lowest ask. They act as a ready buyer and seller within the market and ensure there is ample liquidity, whilst profiting off the difference between the spreads. The services provided by these professionals can cost large amounts of capital, with either third parties providing these services or the exchange themselves. Conversely, DEXs are also known as Automated Market Makers (AMMs) and utilise pricing algorithms and liquidity pools to fulfil the role of market makers, whereas CEXs utilise order books.
Price Impact on Exchange Listings
In the lead up to the exchange listing there is usually a rally in price as people anticipate the increased demand as new potential buyers will have access to the newly trading coin. The additional liquidity that comes with CEX listings also enables investors with deeper pockets to enter the asset with greater ease without experiencing large amounts of slippage. This generally leads to greater trade volumes and more attractive and predictable price action to trade, reducing the volatility of the coin.
This can also be attractive from the project and team’s perspective as they can liquidate their holdings more aggressively to raise additional capital to fund the project without impacting the price as heavily. This is obviously frowned upon by token holders, as in their eyes, they are essentially being dumped on and this can create distrust within the community. However, if the funds are genuinely used for development and growth, and the strategy is communicated and voiced effectively within the community, the distrust vibes can be mitigated.
Price Impact on Quant (QNT)
Here we can see the effect that Kucoin, Coinbase and Binance listings had on Quant (QNT). Prior to the Kucoin listing, QNT was only listed on Uniswap and lesser-known exchanges. The day QNT was listed, 7th February 2021, its price reached a peak of +133% higher than its opening trading price and 24 hours later was +28.3% higher. On the initial day (24th June 2021) QNT was listed on Coinbase the price increased by +35.2% within the first hour, and 24 hours later price had closed +3.8% higher. The Binance listing (26th July 2021) caused price to gain +56% within 30 minutes and 24 hours later price closed +24% higher.
From a long-term perspective, we can review the price action using the QNT/USDT Kucoin chart. The Kucoin and Binance launch were the most impactful, with prices rising by +23.3% and +105.4% after 30 days respectively from their opening trading price. Coinbase only had a +10.9% price increase after 30 days.
Price Impact on Shiba Inu (SHIB)
To cater to the more degenerative side, we have SHIB. As the Binance and Kucoin listing were both on the 10th May 2021, we will only consider the Binance price action. This experienced some serious upside on the day of the listing with price exploding and peaking at +254% from the opening price. 24 hours later, the price was still +121%.
The Coinbase listing on 9th September 2021 took the dog-loving degen SHIB hodlers on a roller coaster with price skyrocketing to a peak of +858% from the opening price and settling 24 hours later at -24% from the opening price (Yes that is correct) — some brain melting price action.
Looking at the following 30 days of both listings, the Coinbase one was more profitable, and substantially less depressing, with an increase of 300% in the following 30 days. This exceeded the Binance listing which saw prices fall by 50% in the following 30 days after the listing.
It is difficult to gauge if the price increases were purely down to the exchange listings and the increased demand that followed from the heightened exposure and accessibility that is present from a major exchange listing, or there were other factors at play. For example, the SHIB listing on Binance and Kucoin marked the beginning of the summer 2021 bear market, whilst the QNT Coinbase and Binance listings occurred when the market was recovering and coming out of this period. However, in all instances there was an immediate and noticeable impact on the price action. The combination of a major exchange listing, substantial hype for the coin and overall bullish market conditions, where there is a “risk-on” attitude, provides the perfect concoction for seeing a coin perform well in the following weeks and months of being listed.
Messari, the crypto analytics hub, also explored the exchange listing effect in March 2021, with their results concluding that listings conducted on Coinbase had a greater positive effect on the price of a token over the five days that followed the listing compared to other major exchanges. When accounting for outliers, Coinbase was found to have an average return of +29%, followed by OKEx with +20%, Kraken with +15%, FTX with +12% and Binance with 0%, and finally Gemini with a marginal loss.
As shown in the examples above, *Cough* SHIB *Cough*, it is wise to tread carefully and to not act like a complete ape on exchange listings. As always in crypto and financial markets, the best course of action is to have a plan of all the potential outcomes and prepare for how you will deal with each individual circumstance. This plan only works if you execute it the way you set out, and in the midst of the listing hysteria ignoring the fear, FOMO and greed can be challenging.
Conclusion
It could be argued that the hype of exchange listings has been diminishing as more and more coins are listed on major exchanges. In previous years when there was greater skepticism and uncertainty, a coin being listed on major CEX was a big deal and suggested that the team listing the token saw the project as promising with a potential future. However, as tokens like SHIB and other meme coins are listed on major exchanges, it begs the question if exchanges are purely listing tokens that are “Hot” and will bring in high trading activity and volumes. Comparatively, “boring” fundamentally sound coins, that debatably have real use case, can often take months to list on major exchanges and may not drive the same volumes and hype that trending meme coins exude. As with all free markets, demand for these tokens will ultimately drive the likelihood and pace of them being listed, even if they have no extensive utility.
This diminishing hype has also been driven by the decreased scarcity of being listed on a CEX due to the increased number of coins already listed on them. When there was only 20 coins listed on Coinbase to trade, an additional coin was a 5% increase, with the possibility that trade volume will flow to the newly listed coin as it is acknowledged to a greater extent. Now there are 165 coins on Coinbase with the introduction of an additional coin unlikely to attract as much attention, especially if it is not trending or had extensive marketing campaigns. The scarcity of being listed on a major exchange still comes with a pedigree that creates a sense that coins listed on there have been vetted and therefore have increased credibility. Today, this still drives swathes of crypto investors to buy the rumour and listing of coins on major exchanges for a quick profit and results in the explosive price action.
It will be fascinating to witness the evolution of DEXs and CEXs in the coming months and years as incoming regulation demands KYC And AML procedures, whilst crypto users are increasingly holding onto their right to anonymity and right to have self-sovereignty over their assets. The endless and incomprehensible pace of innovations within DeFi are also increasing liquidity efficiency through innovating liquidity provision and incentives through the likes of Thorchain and Liquidity Mining Campaign’s of AllianceBlock. The increased liquidity depths of DeFi will soon eliminate one of the major hinderances to further institutional DeFi adoption — lack of liquidity. Another being self-custody. This is also being addressed by companies such as Fireblocks, Qredo and Metamask Institutional who provide refined and secure solutions for large-scale institutional DeFi activity.
The nascent world of DeFi is already booming and as it becomes more refined and approachable, will the next flippening be DEX/CEX trading volumes? Time will tell.
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I am not an analyst or investment advisor. Everything that I provide here site is purely for guidance, informational and educational purposes. All information contained in my post should be independently verified and confirmed. I can’t be found accountable for any loss or damage whatsoever caused in reliance upon such information. Please be aware of the risks involved with trading cryptocurrencies.
