On Tuesday (18 September 2018), Bloomberg released a research report prepared by premier ICO advisory firm Satis Group. This report is the final part of a five-part series on the cryptoasset market, and it covers the topic of trading and custody solutions for cryptocurrencies.
There are two types of exchanges: centralized exchanges and decentralized exchanges. However, since decentralized exchanges usually do not deal with fiat currencies, centralized exchanges are responsible for almost all (99.8%) of the market trading volume. And when it comes to centralized exchanges, over 75% of trading volume flows through the top 20 exchanges.
The main advantage of these is that there is "no centralized authority for settlement" although "some aspects, such as the order book, may still be centrally operated." Trades are carried out between users via smart contracts, and executed/recorded on the blockchain (e.g. Ethereum). Although ease-of-use, liquidity, and confirmation times are currently not great, over the next 5-10 years, as these factors improve, decentralized exchanges are expected to play in a much more significant role in the crypto space.
With centralized exchanges, you have to trust a central authority with your funds (fiat or crypto). Each exchange has a set of fiat currencies and cryptocurrencies that it supports. It is worth noting that not all centralized exchanges support fiat currencies. For example, although Binance, the largest centralized exchange (by trading volume), is currently trying to create spin-offs that support fiat (because that is what most customers want), the main Binance exchange does not.
There are several ways in which these exchanges can make money:
- trading fees
- withdrawal/deposit fees
- cryptoasset listing fees (paid by the projects that created these coins/tokens)
- maker and/or taker fees (usually, less than 0.3 percent)
It is not easy to rank exchanges by trading volume, since many new exchanges create fake volume by offering effectively free trading and also engaging in wash trading.
Satis Research selected a group of centralized exchanges and proceeded to study them, with the findings presented using an impressive array of tables and charts. Here are a couple of these:
Over the Counter (OTC) providers are an ideal solution for professional traders, institutional traders, or high net worth individuals who are able to do trades of generally over $100,000 in value. They can offer "significant levels of liquidity, without imposing the risk of causing a major price swing on a conventional exchange." Majority of these trades are done manually rather than going through a website or a mobile app. In the old days, communication was done by phone, but these days, it is most done through Skype. Here are a few of the most well-known OTC Desks:
Platforms such as LocalBitcoins.com, let buyers locate sellers who live in the same country (or even in the same city), and buy crypto (usually Bitcoin) using either cash (in which the buyer and seller need to arrange where to meet face to face) or by sending payment to the seller's bank account. In the case of LocalBitcoins, peer-to-peer trading of Bitcoin is supported in more than 16377 cities across 248 countries.
Crypto ATMs are one of the easiest and quickest ways to buy/sell crypto. These machines exist at over 3,755 locations across 74 countries. The website "Coin ATM Radar" (with its accompanying mobile app) is a great resource for finding these ATMs.
Consumer Custody Solutions
There are three types of solutions:
- exchange wallets
- software and web wallets
- hardware wallets
Each of these approaches offers its own balance between ease-of-use and security.
These are the cryoto wallets that are automatically provided for you at centralized exchanges for each of the cryptocurrencies that you own. These are easy to use (e.g. you don't have to worry about securing your private keys because you won't have any), but security is a big concern, since exchanges do get hacked quite often, and if the exchange cannot cover its customers' losses, then your crypto is gone and there is not much you can do about it.
Software and Web Wallets
Here, you use an app (desktop or mobile) or a website to provide you with wallet functionality. This approach is more secure than exchange wallets since you are not relying on a third party for custody of your crypto holdings. The main problem is that it is not always easy to stop the device running the wallet app from getting infected by malware.
Two examples of software wallets are Exodus and Jaxx (newest version is called "Jaxx Liberty"), and an example of an extremely popular web wallet is MyEtherWallet (this supports Ethereum and any Ethereum tokens).
Hardware wallets (or cold wallets) are generally small dedicated USB devices that store the users' private keys. The private keys never leave the wallet. As with software and web wallets, hardware wallets support the concept of a "seed phrase" (a collection of 12 or 24 random words in a specific order, which can be used for restoring your wallet if you ever lose your access to the wallet).
This is the most secure approach, and it is suitable for large crypto holdings.
Institutional Custody Solutions
Most institutional investors need to have their crypto held by a third-party custodian. And most custodians use cold wallets for storing their clients' crypto holdings.
Here are some of the main players in this space:
All Images Courtesy of Satis Group