What could happen to smaller cryptocurrency exchanges in the future?
Blockchain

What could happen to smaller cryptocurrency exchanges in the future?

By Giorgi Mikhelidze - 19 Sep 2019

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Many cryptocurrency investors believe that due to the growth in popularity of blockchain technology more and more people are beginning to diversify their assets across multiple cryptocurrency exchanges. 

This is due to the security issues that most try to avoid. For example, if a person has 100 BTC concentrated on just one exchange, it’s possible to lose it all from a single hack, while diversifying it across 4 different exchanges, mitigates the risk quite a bit.

However, we need to consider the mindset of most traders. Those who place daily trades and try to capitalise on the massive volatility of the market are less likely to diversify their assets on different exchanges, thus concentrating the trading volumes on the largest and most convenient exchanges.

Looking at how most traders tend to go for short term gains while major altcoins struggle to consolidate, especially in the last couple of weeks, it’s only natural to see the trading volumes being concentrated on large exchanges offering exotic cryptocurrency pairs.

This is why we’re seeing reports from South Korea which indicate that 97% of all crypto exchanges could shut down at some point due to low trading volumes, while the 5 largest exchanges remain solid.

But this is just one country we’re talking about. What about a more global scene? Will it translate into the world markets as well? Let’s find out.

Why large exchanges are outcompeting smaller ones

Although it’s obvious that larger exchanges have much more resources to be competitive against smaller ones, there are other more important details on why they target their consumers.

But before I mention those advantages, there are some key points that these exchanges can’t compete with. One of them is the location.

Why small crypto exchanges still exist

One of the primary reasons why smaller exchanges are able to stay alive still is their ability to provide lower commissions on depositing or withdrawing funds from their platforms.

However, it all comes down to the location advantage that we mentioned earlier. Let’s take a very small developing country as an example, that has a high volume of cryptocurrency and blockchain adoption. The first country that comes to mind is Georgia, which is on the second place of the largest crypto mining countries.

The desire of trading cryptocurrencies in the country was always high, but there was no local crypto exchange that would cater to the demand. Therefore, these traders had to place most of their trades on foreign large exchanges. This means that they had to deposit in foreign fiat currencies as well as face higher fees due to international transactions and no support from local banks.

In some cases, the fees were phenomenally high, somewhere around 30% or so. Which is why local exchanges are starting to dominate the scene, even though they’re quite small and feature only a dozen coins.

According to local market experts, who met with the founders of local exchange, fees are the primary advantage that will help the company grow and dominate the market:

“Before a local exchange was created, most Georgians were forced to trade with exchanges that are relatively popular. Places like Binance or Coinbase were the primary destinations. However, due to the financial situation of the local populace, the most they’d be able to deposit was around $500, which is like an above-average salary here. The fact that they’d be losing 30% of that deposit in fees was just too much to handle, but there was no other way. Now that a local exchange is opening, it’s definitely going to dominate the market because it’s going to partner up with the local banks, therefore lowering their fees.

The biggest fear of a local cryptocurrency exchange right now would be if Binance or Coinbase or any other international exchange decided to open an office here and partner up with the banks as well. In that sense, they’d have absolutely no room to compete with them.”

Why smaller exchanges will cease to exist soon

Even though the experts from a smaller country explained the advantage of a small exchange on a very detailed level, there are other reasons why larger exchanges can dominate the market.

One of those reasons is because they’re much more durable. The durability comes from the fact that they can endure another crypto winter much easier due to the reserves of their stablecoins, and of course, the possibility of enduring a loss translates into dominating the market.

For example, a large exchange, if they wanted to enter a market, they’d very easily subsidise their services for that local market and put the customer at an advantage. Sure they’d be working at a loss, but doing it for about a year is enough to get loyal customers.

We’ve seen multiple international companies use this method to conquer a local market. Ridesharing applications are first to spring to mind. When entering a new market, they calculate the current industry-standard prices and give a 50% discount. What does this mean? This means that if a normal ride costs $10 in a country, the company would offer it for $5 at a discount. 

The discount is very important to note, as it’s not considered an actual price. Therefore, once prices become $10 again, it will be considered as an end to the discount promotion and not a price-hike.

It’s quite a strong strategy and has worked pretty much everywhere around the world so far.

In conclusion, it’s safe to say that the article we’ve seen talking about South Korean crypto exchanges going bankrupt soon is going to feature some US, UK, and every other country’s crypto exchange very soon, as long as big exchanges continue to grow in a bearish market.

Giorgi Mikhelidze
Giorgi Mikhelidze

Giorgi is a Georgia software developer with two years of experience trading on the financial markets. He is now working to spread the knowledge about the Blockchain in his country and share all of his findings and research to as many crypto enthusiasts as possible.

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