With low barriers for entering, competition for digital asset exchanges is intense, with an estimated more than 10,000 exchanges now operating worldwide. This competition reduces margins for all of them and also lowers deposit and withdrawal thresholds. Add in a confusing patchwork of global regulations, and profitability challenges for digital asset exchanges loom large.
Digital asset exchanges must overcome these obstacles to attract institutional traders who will generate the sector’s next growth wave. These high-powered traders seek crypto exchanges that can give them the liquidity they need, as well as an edge in speed with instant deposit, withdrawal and transfer. Equally important, the ability to offer instant settlements would enable them to make more trades with less capital. The path forward lies in a new paradigm that brings the expanding universe of players closer together.
The perils of fragmentation
The market fragmentation brought on by so many exchanges operating globally has had a wide-ranging impact on digital asset trading. Due to disparate regional and local regulations, crypto exchanges must primarily pair with local fiat currencies for their trading, causing them to act as isolated trading islands with limited liquidity. No trading platform represents more than a 5% share of spot trading volume. This limited liquidity leads to different prices across geographies and exchanges.
Even so, this market fragmentation creates market opportunities for traders. Savvy traders will execute cross-exchange arbitrage trades, acquire organic liquidity from other regions, and/or execute on strategies that depend on more reliable signals from untapped global liquidity. However, there are strong barriers to execution. For institutional traders to fully realize these opportunities, they need capabilities for instantaneous cross-exchange transfer, instant global settlement and instant reallocation of funds across exchanges.
A fresh network to move value faster
Institutional traders will lead the next wave of digital asset trading adoption. A recent report from Fidelity Digital Assets found that nearly 80% of approximately 800 institutional investors surveyed expressed interest in the space. The exchanges that can adapt quickly to their needs will be in the best position to attract and retain these valuable traders — it’s an evolution that could generate up to a 200% trading volume increase.
Ideally, there would be a single unified solution that helps crypto exchanges significantly improve their performance in areas important to institutional traders. These traders must currently employ costly workarounds, such as holding accounts with multiple exchanges and spreading trades out among them, an inefficient arrangement that also makes for poor capital utilization. What they need is the ability to achieve faster deposits, withdrawals and cross-exchange transfers to take valuable capital off the sidelines and to execute more profitable trade opportunities.
Unsurprisingly, for the cryptocurrency exchanges, the answer lies in fresh blockchain technology applications. An instant global settlement solution would resolve slow withdrawals, deposits and transfers. The new type of network provides truly instant global clearing and settlement of most asset classes for digital asset trading platforms, banks and traditional trading institutions. The participants in this new ecosystem will enjoy real-time clearing and settlement for digital assets and payments that are secure, reliable and convenient.
Exchanges participating in a global instant settlement network gain many advantages in attracting institutional investors and traders to their platforms. Overall, a network provides institutions access to a more unified, global market. Participation gives exchanges the ability to provide instant deposits and withdrawals, enabling institutional clients to rapidly transfer capital between exchanges while increasing capital utilization.
Settlement speed also increases, which enables the execution of cross-exchange strategies. For example, traders can buy Bitcoin (BTC) on one exchange valued at $9,000 and then immediately sell it on another valued at $9,150, avoiding potential price swings that would introduce risk into such trades while awaiting settlement, which can take from 20 to more than 60 minutes. Other advantages of this approach include a reduction in settlement costs, which helps to boost profit margins.
A win-win situation
Better pricing and liquidity are keys to trading, but they are not the only considerations for institutional traders. Ease of use, cost and settlement time are equally important factors in choosing a trading venue. The flow of funds and velocity of funds are also important to traders when selecting where they will execute their trades — seamless movement and redemption become easier when all of these processes take place within such a network.
An even bigger win-win takes shape as the global instant settlement network grows. Network effects increase value and unify the previously fragmented landscape of exchanges, each of which sees greater revenue via the rise in institutional volume. With that kind of impact, it’s clear why the global instant settlement network model isn’t just a differentiator for exchanges. It’s a necessary step to enable institutional traders to execute global trading strategies.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Haohan Xu is CEO of Apifiny — a global liquidity and financial value transfer network. Prior to Apifiny, Haohan was an active investor in equities markets and a trader in digital asset markets. Haohan holds a B.S. in operations research with a minor in computer science from Columbia University.
