--Despite growing hacks and a torrent of criticism over price and volume manipulation, economists and hedge fund managers expect the sector to thrive - even as naysayers say cryptos won't exist in 10 to 20 years.
--The bosses of upcoming upcoming ICOs Idap, Encrybit and Qurrex join hybrid platform Legolas in revealing how they plan to win the crypto-exchange game, outlining growth targets.
By Ivan Castano
Cryptocurrency exchanges could see trading volumes surge to $200 billion if digital currency markets hit $1 trillion to $2 trillion by 2021, ICO executives and analysts said, even as interest in digital coins continued to wane in the two-month bear market.
“The crypto market is very undervalued and the trading infrastructure and exchanges are not up to par with regular exchanges which is why a lot of investors and traders are staying away from the market,” said Awanish Rajan co-founder and CEO of Idap.io, a crypto derivatives bourse looking to garner $17 million in its ICO in late August. “As exchanges mature and trading volumes and profit increase, growth can be exponential” or 10 times current trading volumes, Rajan added. “In three years, I expect the market will be $1 trillion to $2 trillion so exchanges should have $200 billion in daily volume.”
Independent economist Yaniv Feldman agreed growth could be stellar.
Exchanges “could easily grow 10 times,” he said. “It’s a reasonable assumption” as the budding digital-payments industry continues to develop. “The dot-com bubble burst at $6.5 trillion. Given that we are at a quarter of a billion, the cryptocurrency space could very well grow 30 times more.”
The ICO party also seems unabated and set to raise $15 billion this year, despite recent reports that 800 coins are already dead, analysts said.
As of mid-2018, there have been 64 exchange ICOs worth $695 million, taking 7 percent of $10.3 billion raised so far, according to Tokendata.com, which adds 63 more are in the pipeline. That compares with $675 million secured in 2017 when 82 ICOs took 10 percent of $6.5 billion garnered.
Tripling hacks, manipulation jitters
Despite the rosy forecasts, coin-swapping platforms face a string of challenges including ballooning hacks, manipulation claims and regulatory uncertainty that could dent future growth, analysts said.
In the January-June period, criminals stole $731 million from exchanges, three times more than $266 million in 2017, security firm CipherTrace revealed this week, underscoring just how worrying crypto heists have become, spurring a hike in coin money laundering. The news spooked investors who dumped bitcoin 2 percent to $6,561 in midday trading, reversing a 48-hour recovery.
Earlier this week, Kraken slammed a Bloomberg report alleging it is rigging the price of Tether, a cryptocurrency that is reportedly backed by one U.S dollar (though many dispute that claim) saying its journalists’ lack of understanding of exchanges’ basic innerworkings “defied logic.” Today Kraken also charged Bloomberg’s financial information terminal with helping manipulate bitcoin futures prices.
Despite its missive evoking “fake news”, the U.S. Commodity Futures Trading Commission (CFTC) is currently investigating Kraken for alleged futures’ price manipulation it says could distort bitcoin prices. To be fair, rivals Coinbase, itBit and Bitstamp are also being probed for similar reasons.
While one or two exchanges may have engaged in wrongdoing, “there are 10,000 or so exchanges so the idea that all of them are colluding to manipulate prices is highly unlikely,” said Chad Anderson, CEO of crypto hedge fund Oceanside Digital Assets in Los Angeles.
And even though some analysts say rogue bourses could eventually be fined, Anderson hopes regulators will bring “a light touch” to crypto as "overregulation will stifle innovation."
The executive, working to launch a $30 million investment fund by year-end (it has so far secured $3 million) agreed exchanges’ daily volume could surge 10 times, sooner than in Rajan’s timeframe, if crypto’s market hits $1 trillion.
“Coinbase just launched a custody product and many others are looking to ramp up their offerings,” said Anderson, whose fund will invest in “anything blockchain” from entertainment to e-sports to real-estate. “A lot of money is already moving outside the exchanges in the OTC market and the volumes are huge.”
Bitcoin bourses have also been rapped for “artificially pumping market volume”, handing their own blockchain coins to traders in what some critics, including Binance’s CEO Changpeng Zhao, have slammed as a “back-door ICO” strategy unfair to retail traders. Analysts have said China’s Okex is faking 90 percent of volume.
‘Liquidating you at $6,000’
Platforms have the right to reward frequent traders with their own coins, according to Rajan.
“Giving rewards or trading rebates is not illegal,” he said, adding that the activity won’t taint the industry’s image or scare off traders. “The only way I see traders exiting is if exchanges manipulate prices on their side, if say bitcoin is trading at $7,000 and suddenly they liquidate a trader at $6,000 which has happened at Okex and others.”
Rather than using bot trading (which can be illegal in the traditional securities markets), Idap will strike partnerships with investment funds and trading houses to boost trading and liquidity, according to Rajan.
The Estonia-based enterprise has also applied for a derivatives-trading license with the EU “so we are not going to be allowed to do that [pump trading volume]. We are going to have strong compliance,” Rajan added.
Rajan said exchanges will need to invest in top IT and risk management solutions to tackle insider manipulation though he expects the activity will lessen once and if the cryptocurrency space becomes regulated.
At press time, some of the world’s top altcoins were staging a mild recovery after taking a big tumble in May led by bitcoin’s collapse, which dragged the nascent peer-to-peer digital payments industry’s valuation to a hair under $270 billion, down from nearly a trillion in its January all-time high.
Do you even believe in crypto?
For some crypto skeptics, the idea of exchanges striking gold in a sector they don’t fundamentally believe in would seem highly farfetched, said a top economist at a U.S. midsize bank who asked for anonymity because he was not allowed to speak to the media.
“I don’t see a reason why cryptocurrencies traded in exchanges today will have any value in 10 to 20 years, that they won’t be replaced by a conventional currency or a centralized cryptocurrency,” said the economist which works for one of the banks that banned crypto-credit card purchases earlier this year. “The fundamental value of fiat is that governments require businesses and consumers to use it for daily purchases and to pay taxes. That requirement does not exist for crypto today.”
Despite the naysayers and the prolonged bear market, executives were confident the decentralized virtual money revolution will continue, with trading activity picking up when the bull market returns.
Rajan forecast exchanges could eventually deliver profits and revenues of around $100 million and $10 billion respectively as crypto adoption leaps forward.
Currently, trading volumes hover at $15 billion to $20 billion with market leader Bitmex taking the lion’s share with over $2 billion changing hands, according to Coinmarketcap.com. Based on average transaction fees of 0.05 percent, Rajan estimated Bitmex earns $10 million a day with a 60 to 70 percent profit margin.
Idap’s goals
Idap plans to up the ante on Bitmex’s leveraged trading by including riskier, so-called spreads and butterfly futures contracts, with a profit goal of $20 million to $30 million a day, assuming that derivatives trading accounts for 50 percent of overall volumes in three years.
“We expect $100 billion in daily volume for the derivatives market and we want to be the leader and have a 60 percent and 70 percent market share,” boasted Rajan, whose fledgling enterprise just raised $2 million from wealthy Indian and European investors in a private sale.
Idap will offer five undisclosed crypto trading pairs when its web site launches in late September. Unlike rivals, it will feature its own proprietary mobile and desktop software providing traders with enhanced functionality and faster, high-volatility trading with fewer downtimes, according to Rajan.
“In the financial system, exchanges are not in the business of creating trader software but as a crypto exchange, we are going to do that to offer better customer service,” he noted.
Idap faces cut-throat competition from a flood of start-ups looking to profit from global crypto madness and eclipse incumbents like Bitfinex or Binance, which Friday said it expects 2018 profits will hit $1 billion.
The ‘People’s exchange’
One of them is Encrybit. The Indian-owned exchange is hoping market sentiment will turn as it prepares to launch a $32 million ICO in September.
Branding itself as the “People’s Exchange,” the start-up aims to help investors learn trading, CEO Jitendra Rajput revealed, adding that the platform is scheduled to launch in spring 2019.
“We are building a product to really help traders,” Rajput said. “We are going to offer a broad functionality including demo-trading applications, smart alerts and social/advise trading free of charge. Right now, if investors want advice in an exchange, they have to pay for it.”
Targeting 10 million traders by 2021, Encrybit will tackle traders’ growing security concerns by building “three-layer protections” with different server aliases and offering cold and active-wallet storage.
“If we don’t have traders, we can’t make any money,” Rajput said, just as Encrybit was tallying the results of an ambitious survey to help it understand what traders need. The study revealed that traders worry most about security, high fees and customer service. “The exchanges with the best trader satisfaction will win this game.”
To streamline customer service, Encrybit will offer multi-language telephone and online customer support, Rajput added.
And as decentralized exchanges gain traction (albeit with a slew of technical and liquidity problems), the firm is considering adding such capabilities in future, eventually creating a hybrid platform, according to Rajput.
Legolas’ game
Meanwhile, Legolas, which completed its ICO in winter, is preparing to launch its hybrid platform in October, according to CEO Hugo Renaudin.
The French start-up combines a decentralized order book, a centralized buy/sale matching engine and a third-party custodian to hold people’s funds. This helps improve transparency and enables hack-wary investors to retain their digital assets, just as they can with purely decentralized exchanges.
Legolas is working to lure the deep-pocketed institutional traders needed to propel crypto to new heights, said Renaudin.
By providing a fiat-to-crypto gateway and sharing wallet keys between it, its custodial partner and customers, it hopes to eliminate decentralized platforms’ crypto-only trading limitations and the head-banging stress people go through when losing their private keys.
Despite bitcoin’s slump, Renaudin said crypto exchanges can thrive in the medium-to-long term if tokenization speeds up.
“Today you can tokenize everything that is valuable, from a building’s ownership to a football player’s rights,” mused Renaudin. “So depending on the assets that eventually get tokenized, 10 times growth is reachable as is 100 times.”
‘Thousands of mini-exchanges’
Slava Baikalov, CTO of fledgling hybrid exchange Qurrex, was more conservative, predicting exchanges could lift trading volumes to $120 billion to $150 billion in three years -- and $300 billion to $400 billion by 2026.
He conceded the sector faces tough regulatory and adoption challenges.
“We need to create the [right] infrastructure to meet institutional clients’ needs, stop being a black box to create openness and transparency and establish an independent and trusted custody institution,” Baikalov said.
For Qurrex, obtaining an EU operating license and building a high-quality exchange will be a big challenge, Baikalov added.
However, he said the platform featuring a unique decentralized engine made up of “thousands of mini-exchanges,” will give it a leg against rivals.
If all goes well and if it can attract enough institutional players, Qurrex’s annual revenues should hit $100 million to $150 million by 2021-2023, Baikalov concluded.
