$72 Faked Billion: How Cryptocurrency Exchanges Struggle to Survive

Running a cryptocurrency exchange is a troublesome business. Lack of
regulation, money laundering, listings of questionable cryptocurrencies —
this is just a short list of their problems. Nevertheless, none of
these stop both established and freshman platforms from earning millions
of dollars.

Exchanges are in the spotlight of the cryptocurrency market and, for
better or for worse, they are mostly associated with negative news. In
the first quarter of 2019 alone, hackers managed to steal $365 million
from trading platforms. One of those hacked was no less a platform than
Binance, one of the largest crypto exchanges in the world.

And hacking is just one danger. Customers of Canadian exchange
QuadrigaCX lost $145 million in cryptocurrency due to mismanagement and
possible fraud.

At the same time, bitcoin exchanges are constantly under fire for
faking trading volumes, which critics say could constitute up to 90% of
the overall market turnaround.

Even so, the continued flow of new players to the market is just one
piece of evidence that the rewards of crypto outweigh the problems. With
the right approach, it is possible for a crypto exchange to earn
hundreds of millions of dollars in profit. Even traditional companies
can’t resist such an opportunity.

Yahoo enters cryptocurrency exchange business

This spring saw a number of big-name corporations announce plans to
enter crypto business. At the end of May, another player with roots in
traditional business got into the list of cryptocurrency exchanges:
Yahoo announced the launch of its own trading platform, Taotao, in
Japan.

Last year, Yahoo acquired a 40% stake in BitARG, the exchange that
later became Taotao. The remaining 60% of the platform’s shares are
owned by CMD Lab.

Taotao is a fully regulated bitcoin exchange with a license from the
Japanese Financial Service Agency. So far, the platform offers only
trading with bitcoin, ethereum, ripple, litecoin, and bitcoin cash.
Professional traders, however, can enjoy margin trading with XRP, LTC,
and BTC. Taotao promises to improve functionality and expand its list of
trading pairs in the future.

Taotao is just one example of how new players, even those from the
traditional sphere, can successfully enter the crypto industry. In
reality, most platforms out there are much smaller that Taotao. There
are dozens of small, local crypto exchanges, the opening of which is
difficult to track.

Given the profitability of the crypto business, it is likely that this influx of new players will continue.

Billions of dollars in profit

Cryptocurrency exchanges do not publish financial statements and
reports. Therefore, it’s hard to track their incomes and expenditures.
However, it is possible to understand how much they earn by looking at
the self-reporting of industry leaders.

Last October, Bloomberg reported that Coinbase, one of the oldest
trading services, planned to earn $1.3 billion in revenue in 2018. This
figure was slightly higher than the $1 billion profit Coinbase made in
2017, according to its own reports.

So far the company also hasn’t disclosed figures for last year, but
according to a Reuters study, the revenue stood at $520 million for the
entire year.

Of course, this is a fraction of the stated goal. But it is worth
remembering that in 2018 the crypto market collapsed. At the beginning
of the last year, the BTC price had reached its peak of almost $18,000
and dropped to $3,700 by January 2019, according to Coinmarketcap — a
79% decrease. Other coins followed the BTC trend, in some cases
decreasing by 99%.

The bears on the market also hit trading volume lows. According to
Coincheckup, the global daily trading volume was $68 billion in early
January 2018. Already in 2019, that number had decreased to $12 billion.
In the case of Coinbase, most of its revenue had come from trading
fees. Fewer people making trades meant fewer trading fees, which led to
an overall decrease in profit to the platform over the previous year.

Nevertheless, considering the market collapse and volatile
environment on the crypto market, $520 million is an impressive result.

Coinbase is not the only platform to make a profit. Binance, another
large cryptocurrency exchange, received a net profit of $446 million in
2018, according to The Block. Binance was posed to beat their record
from the previous year, earning $78 million in net profit in the first
quarter of 2019 — 66% more than the quarter before.

Binance, like Coinbase and most other crypto exchanges, earn most of
their profits from trading fees. But platforms are earning on other
types of services, as well. For example, crypto projects pay servicing
fees to list their coins. Large players, as a rule, select coins
cautiously, but there are also a lot of exchanges that are ready to add
to the listing even a bald scam, as long as they are paid.

Scams, frauds and fake trading

If you look at the revenues, it may seem that crypto exchanges are an
easy business. In reality, they struggle to survive in an industry in
which there is almost no regulation and is rife with hackers and
scammers.

That $365 million that hackers managed to steal from
exchanges in the first quarter of 2019 is just the tip of the crypto
iceberg. In May, hackers attacked Binance, a cryptocurrency exchange
which had managed to avoid security breaches for a long time. Now, the
company is recovering from losses of more than $40 million in BTC and
the attackers are still at large.

Sometimes the exchanges themselves act as fraudsters.
For example, in early 2019, the Canadian cryptocurrency exchange
QuadrigaCX announced the death of its CEO Gerald Cotten. Allegedly, he
alone had access to the cold wallets of the company, where the clients’
cryptocurrency, worth $145 million, was kept. An independent
investigation by Ernst & Young revealed that in fact, Quadriga’s
wallets were emptied long before the CEO’s death, and auditors still
haven’t found the money. Customers were left with nothing.

Fake trading volumes are another long-standing issue of the
cryptocurrency exchanges market. To attract more customers and sign
coins for listing, trading platforms must show that they have large
volumes (customers making trades). In reality, crypto exchanges all too
often simply fake their volumes and report false numbers.

In March, Bitwise published a report
on this topic. The company looked only at the BTC trading figures. It
turned out that 95% of the declared volumes are faked. For example, at
that time, the average daily trading volume of BTC, according to
Coinmarketcap, stood at $6 billion. Only $273 million of them was the
real volumes, Bitwise says.

Moreover, this number was concentrated among just 10 crypto exchanges. Among them are Coinbase, Bitfinex, Gemini, and Binance.

Bitwise is not the only company that has come out with such conclusions. In March, The Tie determined that 87% of all trading volumes were fake. Crypto Integrity almost at the same time stated
that fake volumes account for 88% of all turnover on the exchanges. If
we trust even the lowest of these estimates, then $70.4 billion of the
current $81 billion total trading volumes is fake.

While exchanges are ignoring this research, Coinmarketcap — one of
the most popular trackers in the crypto industry — has promised to
revise its methodology in order to more accurately gauge genuine trading
volumes.

Top-10 largest exchanges in 2019

If we imagine that Coinmarketcap’s data is trustworthy, we can determine the 10 largest crypto exchanges by the average daily trading volume. At the beginning of June 2019, their combined volumes exceeded $17 billion, which represents 20% of the global turnover.
Cryptocurrency exchange OKEx comes in the first place by this indicator, with a daily volume of $2.4 billion. Binance ranks second.

It is noteworthy that the list looked quite different at this time in June 2018. At that time, it included only four crypto exchanges from the current list: Binance, OKEx, Huobi, and Bit-z. The combined average daily volume of them stood at just $6.2 billion, which is almost three times less than this year.

Tough market

The cryptocurrency exchanges market is a tough industry, and money
isn’t easily earned. At the same time, the business is rewarding, if a
company gets certain things right. For Binance, which appeared only in
2017, two years was sufficient for it to become one of the most popular
and profitable exchanges in the world.

But making money isn’t the only thing crypto exchanges need to worry about. There are many dishonest practices on the market, not to mention hacker attacks. Sooner or later, the industry will have to stop concealing the problems and begin to solve them if it wants to continue to develop.

source: https://blog.c-hound.ai/index.php/72-billion-faked-by-cryptocurrency-exchanges/