Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
2020 has been a wild year for all financial markets. This is doubly so for the cryptocurrency market because it gains its first real test as a hedge. This tumultuous year has put exchanges to the test and led to the refinement of decentralized exchanges.
However, a recent Cryptowisser report has brought to light a very interesting development: 75 exchanges have shut down in 2020. Cryptowisser’s exchange graveyard keeps track of which exchanges have shut their doors. 75 is a large number and up 56%, according to the exchange graveyard.
It’s interesting to understand why so many exchanges have shut down. Perhaps the cryptocurrency market is moving away from its wild west days to a more sobering time. In any case, one thing is becoming clear: the exchange microcosm is beginning to show some themes.
Decentralized Exchanges are Becoming the Norm
This is, without a doubt, one of the biggest potential game-changers in the market. Decentralized exchanges bring a number of benefits to the table which are otherwise absent in centralized exchanges. However, for much of their existence, they’ve simply been too cumbersome to use.
That lack of user-friendliness is now a much smaller problem, and general applications have increased as well. The birth of the DeFi market has seen a wave of new DEX users, which now has over $8 billion locked into it. The number of traders on Uniswap alone has grown from 24,000 users to over 389,000 since January.
DEXs are closely associated with the yield farming and liquidity provision services of the DeFi space. Combine this with the more secure, faster, and cheaper transactions, and you have a pretty solid case for DEXs.
The Market Shares of Prominent Exchanges are Cementing
It’s also becoming more evident that a few centralized exchanges are cementing their positions as market leaders. Binance, Coinbase, Huobi, OKEx — there are others too — hold most of the centralized exchange market. It can be challenging for smaller exchanges to keep up with them.
Exchanges like Binance have released several new features and attractive incentives that are hard to resist. Technical development, marketing, ecosystem development — these major exchanges are simply ahead of the pack.
It comes as no surprise then that most smaller exchanges are shutting down. However, it’s not safe for bigger centralized exchanges either, as they’ve had their share of problems. 2020 has been a very volatile year. The Black Thursday market crash put a strain on big exchanges, and Binance, Coinbase, and BitMEX have all had issues. Policies adopted by exchanges have also turned users away from them, as in the case of Coinbase.
Regulation Getting Tighter
Regulation is going to be the single most important factor going forward. The market has grown to the point where lawmakers have no choice but to regulate it. This has begun accelerating in recent months, with US officials charging projects and platforms for various reasons.
The most notable of these are the charges filed against BitMEX by the CFTC and the NY Attorney. But the list is much more extensive than that: Telegram, Ripple, and many other high-profile names. These projects have either had or are facing legal problems that they must overcome.
What’s even more challenging is that different countries have different approaches. There’s a clear need for a standardized form of regulation, but that could be a long way off. Those who don’t implement KYC/AML and register as a security could lose out on a market like the US.
Again, it’s hard to say if regulation has led to the closure of many of the exchanges that have shut down in 2020. However, it’s certainly something exchanges have to think about or risk hefty fines or even jail time.
The developments taking place right now are going to deeply affect how the cryptocurrency market plays out in the future. It wouldn’t be wrong to say that the industry has grown past its toddler phase. Insiders must be thinking this too; otherwise, you wouldn’t have hedge funds and companies investing in it.
It would appear that there is a movement towards DEXs, but how lawmakers handle decentralized trading will be interesting. We are far from seeing the industr, at its peak and the next 12–24 months will be crucial in its development. It is a great time for market enthusiasts, who have already gained from 2020s performance.
💡 Did you know: The majority of leading stock apps now offer access to Bitcoin and other popular cryptocurrencies.
What do you think of the state of crypto exchanges? Will DEXs become the new norm? Let us know in the comments below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.