When the going gets tough, the tough charge more.
Or so it would seem from a recent Bloomberg article about cryptocurrency exchanges, which have resorted to unconventional tactics to shore up trading volumes and fees. The story lists three business tactics being used by exchanges to make up for decline in revenues. Here’s a short description of each:
The law of supply and demand does not seem to have caught up with cryptocurrency exchanges. The ICO boom has slowed down as the stampede of startups eager to list tokens has slowed down to a trickle. Regulatory scrutiny further dampened demand for listings as startups increasingly raised capital in private rounds and deferred public listings.
But exchanges still haven’t got the memo.
During the runup in cryptocurrency markets, they were estimated to be charging between $50,000 to $1 million from startups to list their tokens. (By conventional exchange standards, the prices (and their spread) is astonishing, especially when you consider the nascent nature of the cryptocurrency industry and the relative novelty of startups and markets in the space). For context, Nasdaq, which has several established tech behemoths listed on its exchange, charges a flat fee of $50,000 per listing. The Bloomberg report states that KuCoin, a cryptocurrency exchange, asked for a listing price of 50 bitcoins (approximately $326,500 based on today’s bitcoin prices) from companies. But startups are not biting since returns, especially in the current ICO bear market, are not justified.
China-based OKEx has taken a different tack to making money in the slumping market. It favors startup tokens that have a minimum of 50,000 registered users. Out of that number, the exchange asks that 20,000 users be active users of ethereum’s ether. The motivation for its move is not hard to fathom.
This year’s crash in cryptocurrency markets has also led to a corresponding decline in trading volumes. Investors have either cashed out or are staking their cryptocurrencies (i.e., holding them for the long term). Active traders will ensure liquidity, transaction and trading volumes at the exchange.
Promoting Native Tokens
“Native” tokens or tokens that can only be used within the given exchange are another favorite strategy to boost revenues at exchanges. Startups that use tokens native to cryptocurrency exchanges for listing and transaction purposes gain access to an assortment of benefits. For example, startups using BNB, the token used in Binance – one of the world’s biggest cryptocurrency exchanges by trading volume, are offered a 50% discount on listing fee. Bitfinex’s token is used by startups to vote on future candidates for listing on its exchange.
There are two benefits to cryptocurrency exchanges from this approach. First, the native token’s price appreciates with more users and transactions. Second, exchanges can control over the price of such tokens by calibrating supply and demand through buy backs or a “burn” practice, in which a certain number of coins are permanently destroyed, leading to their scarcity.
Will The Strategy Work?
The Bloomberg report quotes Emin Gun Sirer, who heads the Initiative for Cryptocurrencies and Smart Contracts at Cornell University, as saying that the practices are “perfectly reasonable”. “There are too many coins, most of them of questionable value, and the exchanges are in a position to pick and choose. It’s not surprising that they would make demands for the coins to bring in something tangible to the exchange,” he said.
As of this writing, there were 1960 cryptocurrencies listed on exchanges, according to http://www.coinmarketcap.com. Experts estimate that as much as 90% of these publicly-traded coins will cease to exist in the future. This view is reflected in the price movements at exchanges, where most cryptocurrencies mimic bitcoin’s price trajectory. While bitcoin has had limited real-world use cases, other cryptocurrencies are still under development. As such, their utility and effectiveness as a transactional mechanism is still under a cloud.
A crash in cryptocurrency prices would adversely affect liquidity and trading volumes at cryptocurrency exchanges. A large community of users or a steep listing fee can help separate wheat from the chaff and sustain revenues at exchanges.