Complex Made Simple

Why are so many crypto exchanges going out of business?

RIP: Crypto exchanges are kicking the e-bucket at an alarming rate but it has nothing to do with age

Many of the flashy coin projects that saw birth in the 2016 crypto craze are dead At most, there are 150 relevant distributed cryptocurrencies. That’s more than 50% less the number of crypto exchanges Only 8% of analyzed exchanges use a custody provider to store user assets, and only 4% of exchanges offer third-party insurance against hacks

Currency exchanges exist because of fiat money. Crypto exchanges exist because of digital money or crypto.

Ok, but crypto exchanges are more fragile with a propensity to close operations and there are good reasons for that.

Crypto exchanges “bite” the dust

Clem Chambers, the CEO of private investors website ADVFN.com and author of Be RichThe Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide, told Forbes that when he last looked there were at least 350 cryptocurrency exchanges out there.

“Now they are dying away,” he said.

Recently it was CoinExchange.io. It said: “Unfortunately it is no longer economically viable for us to continue offering market services. The costs of providing the required level of security and support now outweigh our earnings.”

Many of the flashy coin projects that saw birth in the 2016 crypto craze are dead. 

Fact is, digital currencies outnumber cryptos, and from a business standpoint, it makes no sense to remain open. 

There are lots of cryptocurrencies out there but when you strip the Ethereum tokens out of that universe, there are left perhaps 30 cryptocurrencies of a scale that would be considered listable were they a stock. At most, there are 150 relevant distributed cryptocurrencies. That’s more than 50% less the number of crypto exchanges.

Read: 4 Blockchain-related projects you should know about

Not only that, regulatory rules and increasing KNC pressures in many countries are no fun for exchanges.  Exchanges are needed but there are too many of them, and the market will not tolerate weak startups from surviving.

Will there be more altcoin to grow the digital exchange market? 

“There is room for a few dozen doing the job of bitcoin, in the same way as there is room for the yen, dollar, yuan and euro but not so much for the like of the reis, ruble and rupee, and less so for any of the other hundred or more “fiat” that are mainly local currencies,” said Chambers.

He adds: “What cryptocurrencies need is a ‘use case’ to exist”. 

The problem with use cases including crypto tokens is that tokens could suddenly become worthless, just like IOUs for real currency. That’s the risk.

“Bitcoin and the mineable decentralized altcoins will always have a place, if only, like gold coins, as a way of hedging the owner from disaster and privation. As coins with new use cases appear so will the benefits of blockchain technology grow,” Chambers adds.

Read: How Crypto Trading can make money in Q4 of 2019

Crypto exchange volumes only part of the story

London-based crypto data provider CryptoCompare has updated its crypto Exchange Benchmark, removing Binance cryptocurrency exchange from the list of the top 10 exchanges. 

And despite Binance being the second biggest crypto exchange by daily trade volume to date, it is excluded from the top 10 in the CryptoCompare’s list, falling from a mid-June 2019 ranking of 7th, as the rankings do not rely entirely on aggregate volume data in its analysis, the firm said in a press release to Cointelegraph on Nov. 19.

In order, the top 10 crypto exchanges are: 

1-Gemini

2- Paxos’ itBit

3- Coinbase

4- Kraken

5- Bitstamp

6-Liquid

7- OKEx 

8-Poloniex

9-bitFlyer

10-Bitfinex

So what happened?   

Binance is now ranked in 12th place. Charles Hayter, co-founder and CEO at CryptoCompare, told industry news outlet The Block that Binance dropped out from the top 10 list following the hack of the exchange in May 2019. Hayter reportedly said:

“Our new Benchmark includes a category for recent hacks for which we penalize exchanges. As Binance was recently hacked, it is marked down in the security category.”

On May 7, Binance experienced a major security breach, in which hackers managed to steal more than 7,000 Bitcoin (BTC) worth around $42 million at the time of the hack.  

CryptoCompare said that the new rankings now include over 160 active spot exchanges. In its Q3 2019 Exchange Benchmark report, CryptoCompare found that only 8% of analyzed exchanges use a custody provider to store user assets, while only 4% of exchanges offer third-party insurance in the event of a hack.

As reported, CryptoCompare launched its Exchange Benchmark in response to a study claiming that 95% of volume on unregulated exchanges is fake.  

Another telltale sign that many exchanges are on their way out.  

Read: Mobile and crypto: A match made in heaven?

Scams and hacks involving crypto exchanges

Following the trouble with QuadrigaCX in early 2019, Vancouver-headquartered Einstein exchange says it cannot return its customers’ Bitcoin worth several million USD.

As reported by Global News, the platform was shut down by the local BCSC regulator after multiple customers contacted their office complaining that they cannot withdraw their Bitcoin

FNB, one of the ‘big five’ South African bank is closing down accounts operated by crypto exchanges in the country. 

Russian citizen Alexei Bilyuchenko, who confessed to being the tech administrator of the infamous BTC-e exchange and later co-founder of WEX, had been questioned as part of a criminal investigation underway in Russia since late 2018, BBC News Russian reported

In his statements, Bilyuchenko said he was forced to send all the cryptocurrency in WEX’s wallets to unnamed staffers of the Federal Security Service (FSB), the successor of the Soviet KGB, shortly before the exchange ceased operations.