Why cryptocurrency exchanges must start to join forces


With more than 500 crypto exchanges around, prices vary depending on where you look, leaving investors trading blind


(click the logo to read on Financial News)

By
Francisco Portillejo Hoyos

August 15, 2018 Updated: 7:03 a.m. GMT

The recent news that the Six Swiss Exchange is launching a new fully-regulated crypto exchange
created a stir among retail and institutional investors alike.

It is not the first to move into the area — CME Group and CBOE have reported a steady increase
in the trading volume of Bitcoin futures since their introduction in 2017 while online platform
Coinbase has also sought approval from the SEC to list fully-regulated security tokens. But the
entry of a name like Six is likely to encourage a broader appetite for crypto and to result in more
investors creating wallets, supporting efforts to make the asset class more mainstream.
Yet we are not working within an established industry like traditional stock exchange trading.
The rule book is out the window and will continue to be until cryptocurrencies are formally
regulated.

Despite well-known names entering the crypto space, the reputation that comes with them cannot
promise best practice standards, ‘best price’ or ‘best execution’ for those looking to take
advantage of cryptocurrencies. Fragmentation of the cryptocurrency industry is currently the
major roadblock.

In April, news outlet Bitcoin.com observed that there are more than 500 crypto exchanges in
existence, with new ones appearing regularly. With the industry in its infancy, investors currently
lack the information to make the most informed trading decisions. Crypto exchanges remain
isolated in a way that is alien to the traditional investor. True market value is reflected differently
according to where you look.

It is also very hard to maximise returns on arbitrage opportunities when you don’t have the
overarching systems with which to compare pricings for high-frequency trading. A ‘total view’ of
the market is missing, and investors are trading blind.
Increasing interest from institutional investors means that crypto is on the cusp of experiencing its
greatest growth potential to date. However, it is not enough to have one or two big names leading
the charge. Cryptocurrencies will only realise their full potential as an asset class if information
pertaining to prices and trading are consolidated across venues. For this to happen, we need the
exchanges to interconnect, or for more specialised liquidity aggregation solutions to come to the
fore.

The vast majority of exchanges will only generate enough liquidity to service institutional
investors if they collaborate. Partnerships between exchanges have to be struck and order books
shared, so as to generate sufficient liquidity and pricing systems. Pooling exchanges would create
the right environment for more institutional investors to come on board and start moving
cryptocurrencies towards becoming a mainstream asset class.

While Six has the capabilities to contribute to the transformation of the crypto exchange industry,
there is more potential to be tapped when crypto exchanges start to collaborate. There may be a
bright future ahead for the exchanges, but pricing issues will not change until fragmentation is
resolved to offer investors greater trading liquidity and a total view of the market.
Although traditional exchanges like Six entering the scene is a definite step forward, they will be
a lot more valuable to the industry as part of an amalgamated exchange pool.
We would do well to focus on creating partnerships between the many exchanges out there and
building a common aggregated order book, to the benefit of investors.

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