Insights into the Digital Exchanges
Over the years, digital exchanges have emerged as one of the best marketplaces to trade digital money in real-time, opening the doors to the world of digital assets and futures markets. At the macroscopic level, it may look a lot like stock markets, matching buyers with sellers and publishing prices, but, in many ways, it is different. Now, before heading off to know, how exchanges are different, let’s get to know about what is digital currency?
The primary concept behind digital currencies is relatively simple; it is a virtual currency which is not regulated by any government agencies. Some of the available digital assets are Bitcoin, followed by Ethereum.
What Are Digital currency Exchanges?
The digital currency exchanges are the platforms that allow one to purchase or sell digital currencies for fiats like dollars, Euros, and pounds, as well as other digital assets. For example, one can trade Bitcoin and purchase dollars with the sold Bitcoin or could exchange Bitcoin for Ethereum (ETH) or other digital currencies.
Based on the types, there are private exchanges, which are exclusively monitored by a single entity that operates by inviting an individual over the platform. Besides this, Local exchanges also exist, which are comparatively more comfortable to use than others and flexible in all terms allowing secure trading of digital assets directly through the built-in chat features of specific popular messengers, like Telegram.
Parameters to consider while opting for a Digital Currency Exchange
While opting for a digital exchange platform, one must keep a note over the following parameters:-
Fees
Majorly, all exchanges charge fees from the traders for doing business over their platforms. Make sure that while signing up or availing services from a specific exchange, one must be completely aware of the fees.
Verification Requirements and Security
It is the most critical parameter to consider before starting on an exchange. Most exchanges demand some identity verification to do the KYC which may require a copy of passport, driving license, proof of residence, or other similar documents before joining. The more complex is the verification process, the safer is the exchange platform.
Exchange Rates
Exchange rates are another vital parameter to consider, as one would not prefer to join a digital currency exchange that charges draconian fees for transactions and transfers.
Reputation
Since every digital currency exchange platform goes through ups and downs. However, the general belief of the top ones is always positive; having a solid reputation and are well trusted by traders.
Region
Another thing worth being considered is that while opting for an exchange platform, one must make sure that it supports their respective geographic region while some exchanges support all of the countries in South America, while others may not endorse any of the countries in Asia, and vice versa.
Security
Something significant to be kept in mind while opting for digital currency exchange is the security measures. The well-known fact is that many exchanges were hacked before, like once the very popular, Mt Gox exchange, which people are still feeling the fall-out from ever since.
Keeping all these parameters in mind, one can extensively take part in the trade of digital currency. However, there are certain drawbacks and pitfalls that the digital currency exchanges are yet to overcome. Let’s have a close look over these:
1. Liquidity
One of the major problems among the various digital currency exchanges is the lack of liquidity, which makes it difficult for users to exit exchanges at the right time price. The lack of liquidity results in two significant problems in the digital currency exchanges. Due to the lower number of buildings on the digital currency market which is large thin spreads on the thin market is bound to happen along with the inefficiencies caused by the difference in the rates of demand and supply. Secondly, the price slippage due to the highly fluctuating digital currency market and hence, the trades do not occur at the estimated price and the time.
For example, in the Bitcoin market, the lack of liquidity is caused by Bitcoin holders. These people hold their Bitcoin to gain profit from it as its value rises, while many other uses are holding onto the digital until it reaches a certain level of profit. Due to this reason, large market price swing and higher volatility are observed, which is subsequently flooding the market.
2. Centralized nature
The centralized nature of the digital currency exchanges becomes easy to target for the hackers, as single authority owns them which is operated and maintained at a single place. For example, consider the case of popular digital currency exchange, Mt. Gox, where almost 650,000 Bitcoin were stolen and resulted in the largest digital currency hack of all time. Another similar hack occurred at the digital currency exchange Bitfinex, taking away approximately 120000 Bitcoin.
3. Clearing and settlements
The regulations put over the digital currencies worldwide abstains it from serving as a medium between the buyer and seller for natural clearing and settlement.
4. Lack of technology capabilities
As per the business analysts, the current technology that the digital currency exchanges is employing does not meet the need for handling the required amount of trading volume. An analysis shows that a minimum of 10 million USD is needed to build and operate a technological setup for digital currency exchange, thus, the better the technology in digital currency exchanges uses, the lesser it is susceptible to the fraudulent activities and market manipulations.
5. Future of digital exchanges
Another thing worth being considered is that if we switch to completely decentralized digital currency exchange platform, then the problem that arises is that a decentralized digital currency exchange platform will not be able to handle large trading volumes and also clearing of the transactions. Further, the number of digital currencies and exchange platforms is increasing extensively by passing year. Presently, there are 218 exchanges (according to CMC), compared to 70 exchanges 3.5 years ago.
6. Trading pairs
Currently, there are around 2000 individual digital currencies or tokens (1,944, according to CMC) functional worldwide. That causes significant problems if one wants to trade one token for another, as the number of possible trading pairs strictly follows Metcalfe’s Law. So with ten coins, one would end up with x=n(n-1)/2=45 possible pairs, 100 tokens already lead to 4,950 pairs and today’s 1,944 currencies add up to a staggering 1,888,596 possible trading pairs. As most of these trading pairs would most likely not receive sufficient liquidity, tokens are usually only found in X/ETH or X/BTC pairings. So trading from token 1 to token 2 requires two trades and leading to double the number of fees needed to convert the tokens.
Beyond this, most exchanges do not support fiat currency pairs which mean traders are forced to buy ETH/BTC from another on-ramp service, such as Coinbase, allocate the coins to exchange and trade it for the desired token. This entire process consumes much time and results in high exchange fees.
7. Customer support
Contrary to the growth seen in the digital exchanges, companies haven’t seen a substantial increase in the last 12 months. However, with rapid growth, comes the potential for companies being unprepared to scale their customer service operations to meet the rising consumer demand. Rapid growth, combined by the complex and 24/7 nature of the digital currency industry, can be steep for even the most established organizations to service, leading to large backlogs of customer support tickets. Thus, a staggering 90-day wait period is now quite common for most of these exchanges. Further, the recent digital-market is an excellent opportunity for exchanges to put their heads down and address the current issues like customer support to be ready for the next wave of market participants coming into digital currencies.
Summing up to these aspects, the blockchain technology, and the digital space are expanding rapidly, with the involvement of more people embracing the world of digital currency. As a matter of surprise, a simple Google search of the term ‘digital currency trading’ yields more than 25 million results, giving a sure indication that the subject of digital currency is continuously hitting the market with a resounding splash, from the last ten years after its invention. In the face of its exponential growth, the problems still riddle the digital market that hinders successful operations, especially on the part of new investors. Thus, it is imperative to take the necessary measures to arrest the growing difficulties in digital currency trading. With the precautionary measures outlined in the above context, traders can find ways to free up their cash, create new forms of value, minimize transaction costs, and boost their business processes, opening doors to a whole new world of digitalization.
To read more articles click here
