The biggest challenge for crypto exchanges is global price fragmentation

It’s no secret that Coinbase has performed an instrumental position in bringing new customers into the crypto house. Coinbase’s pleasant onboarding course of and standing as a publicly traded firm permit it to look as a extra conventional funding platform to non-crypto savvy traders, resulting in larger belief.

Nonetheless, it appears virtually weekly that one other article hits the web about Coinbase and its extreme charges for retail {and professional} merchants and traders. The gripe usually unfolds with a comparability of pricing between a few totally different exchanges. With elevated competitors, the strain for Coinbase and exchanges around the globe to decrease charges is mounting. However, the largest pricing problem dealing with Coinbase and different exchanges is much larger than merely payment constructions.

Commoditization and value

Commodities are items which might be fungible. In different phrases, the market treats items of their varied appearances as successfully equal. When or service is commoditized, there isn’t a additional differentiation between sellers, and all negotiation relies solely on value.

Dialogue about buying and selling charges is rooted in a perception that the worth of cryptocurrencies is static throughout all exchanges — a commodity. If Bitcoin (BTC) had been a real commodity, buying and selling charges can be the one problem at play and the dialogue round Coinbase’s payment construction can be legitimate.

Associated: Crypto wants a decentralized every day reference fee

Nonetheless, this view of Bitcoin belies an underlying drawback inside the market. The worth of Bitcoin is just not a static quantity and might usually differ throughout exchanges. Due to market fragmentation, shoppers are sometimes over or underpaying with out even understanding it.

Fragmentation and true value

Market fragmentation happens when contact and interplay between exchanges are poor. This ends in variations in pricing between exchanges and a dearth of liquidity available in the market at massive.

When these value variances are massive, they quickly subsume any variance in charges between exchanges. Buyers and merchants have been skilled to solely see the worth on a single alternate. However this fragmentation implies that the true value of any cryptocurrency is its value on a single alternate plus the charges on that alternate, in contrast with the identical calculation on one other alternate.

Associated: Belief remains to be a should within the trustless world of cryptocurrency

If the worth of Bitcoin is comparatively low on one alternate, it issues little or no if that alternate has zero charges. Why?

If the worth of Bitcoin is $60,000 and the payment is 0.50% on one alternate, one may pay for a Bitcoin on one other alternate at $60,120 with a 0.30% payment. Sure, with lots of of exchanges available in the market, the worth hole can get this massive at occasions. This variance has led to a proliferation of arbitrage investing — shopping for Bitcoin on one alternate at a decrease fee, after which reselling the identical cash after a switch to a different alternate for a better value.

The largest problem this causes, nevertheless, is that Bitcoin is now not a commodity. With too many pricing variances, Bitcoin turns into nonfungible, and the market stagnates. This movement away from commoditization will finally trigger a possible market implosion. However there may be hope for change.

Market stabilization

This kind of market chaos is just not new nor remoted to the cryptocurrency market. The identical points have occurred in bonds and equities markets, however have been solved over time via regulation. For instance, the US Securities and Alternate Fee has a coverage known as Nationwide Finest Bid and Supply, or NBBO. This regulation requires all brokers to execute trades at one of the best out there ask value nationally when an investor desires to purchase a safety, and one of the best out there bid value nationally when an investor desires to promote.

On this method, the regulation stabilizes the market and protects shoppers from overpaying on any given alternate. Brokers are held in verify, and market forces work cooperatively fairly than unilaterally.

The cryptocurrency market, nevertheless, as a result of it stays in its infancy, doesn’t have this time of normalization in place. Exchanges perform with relative autonomy, and the market’s present state of fragmentation implies that retail and institutional traders usually pay totally different costs based mostly on these exchanges.

The issues with implementation of this method within the cryptocurrency market are manifold — lack of communication, restrictive regulatory compliance and dry liquidity swimming pools holding again any significant change.

Constructing a really unified world crypto market

The basis explanation for the difficulty available in the market is a scarcity of communication or interoperability between exchanges, leading to a excessive diploma of market fragmentation. Nonetheless, the present digital infrastructure is substantial sufficient to help fixed alternate interplay. However for markets to scale globally, this interoperability between exchanges should be seamless.

Associated: Trustless bridges would be the key to blockchain interoperability

Bitcoin is a world asset, arguably much more so than Apple or Tesla inventory. So it’s unfair that merchants can not get one of the best bid and provide at any given time, because the NBBO supplies for conventional equities. Extra enterprise-grade applied sciences and liquidity will even assist mature digital asset buying and selling. All of this might finally permit for one unified world buying and selling market in the same method that conventional shares are traded on exchanges just like the Nasdaq or the NYSE.

With out these options to scale back fragmentation, buying and selling payment arguments and debates are misdirected and don’t inform the entire story. It’s time to degree the enjoying area of equity with the fitting regulation and know-how in place. Finally, it’s not a race for decrease buying and selling charges, it’s a race for one thing much like the NBBO in crypto — a really world finest bid and provide.

This text doesn’t comprise funding recommendation or suggestions. Each funding and buying and selling transfer entails danger, and readers ought to conduct their very own analysis when making a call.

The views, ideas and opinions expressed listed below are the writer’s alone and don’t essentially mirror or characterize the views and opinions of Cointelegraph.

Haohan Xu is CEO of Apifiny, a world liquidity and monetary worth switch community. Previous to Apifiny, Haohan was an lively investor in equities markets and a dealer in digital asset markets. Haohan holds a Bachelor of Science in operations analysis with a minor in pc science from Columbia College.