The coronavirus pandemic has caused global panic in every single market in the world. This is definitely true in the cryptocurrency market, too. While we were waiting for a big occasion – bitcoin halving – the COVID-19 came and changed the focus of our attention.
With many companies having to close their doors already and billions of dollars disappearing around the world, it’s an important time to ask: Which Exchanges Will Definitely Survive the Global Panic?
It’s a complex question, but let’s take a look at some of the changes that are coming about from the crisis, and which exchanges are best to deal with.
Are crypto exchanges at risk?
It’s long been thought that cryptocurrencies would be a hedge in an economic catastrophe. It was assumed that Bitcoin would be a safe haven similar to gold if there was another huge market crash like we saw in the global financial crisis. Up until now, we had no way to know if this was true or not, in the last few weeks and months, we’ve finally got some data.
The Bitcoin price since the global panic began proves that this isn’t true. Bitcoin quickly plummeted in value along with the US stock market. It turns out that the cryptocurrency follows the traditional finance markets more closely than we thought.
This has big implications for cryptocurrency exchanges. It means that we could be in for another crypto winter, alongside a broader economic winter, and some exchanges might fail under the strain. The next step is to find out which ones are at most risk.
Which exchanges are prepared?
It’s extremely difficult for businesses to prepare for something like a disease epidemic. The speed and severity of the current economic impact have been beyond everyone’s wildest dreams.
For that reason, it’s likely that the more established cryptocurrency exchanges will survive in an unpredictable climate. The ones that already have a solid balance sheet, have their financials in order and don’t rely too much on funding and investment.
Exchanges like CEX.IO and Coinbase are good examples of exchanges that have passed the test of time in cryptocurrency. They have weathered crypto market storms before. Both are established exchanges with large international teams and operations. If any exchanges are likely to survive the global panic, it’s this kind of cryptocurrency exchange. They have the cash reserves and experienced executive teams to take the appropriate action to guide the business quickly and effectively in a time of crisis.
The effect on exchanges revenue
The good news is that many exchanges make their money based on the amount traded, which is also called a trading volume. This is because the main source of revenue for most exchanges is in fees and commission on trades. The bigger the total number of cryptocurrency that is traded, the more money the exchange earns, despite what the price of cryptocurrency is doing. In the last few months, the cryptocurrency market has been volatile, but the trade volume has also skyrocketed.
A quick look at the Bitcoin price and volume chart shows that the volume of Bitcoin traded in the past few months since the Covid-19 crisis started has been enormous. In fact, it is higher than ever before. This means that many of the exchanges are likely making more money than they ever had right now. This could be because people are buying or selling cryptocurrency in anticipation of market crashes around the world. Investors want to move their money to where they believe it is safest.
This might not last forever though. The high trade volume could drop as markets collapse. It could be that many people are fleeing their funds from cryptocurrency. This is another reason why established and robust exchanges may fair better in the coming months. They have the cash reserves so make sure their customers can cash out without bankrupting the exchange in the short term.
Decentralized exchanges vs Centralized exchanges
An interesting factor will be whether an exchange is centralized or decentralized. We know that economic shocks are very difficult for traditional business models (i.e. centralized exchanges), but we don’t know how decentralized exchanges might fare in such a scenario.
Decentralized exchanges are cryptocurrency exchanges that operate without a central authority. They act instead as a protocol that facilitates peer-to-peer trading. This opens up some interesting points. With no central authority, it may be difficult for a decentralized exchange to make swift changes in a changing market. Decentralized governance and decision making are notoriously slow, so quick reactions probably won’t be on the cards.
On the other hand, decentralized exchanges often don’t have employees, balance sheets, or any financial obligations at all. They are run by open source communities and voluntary contributors. There are usually no servers to go down and no bank accounts to go bankrupt. In this way, decentralized exchanges may be highly robust in the context of a large economic downturn. We’ve never had a major economic shock since the invention of Bitcoin and cryptocurrency, so we have no other option, but to wait to see.
An opportunity for cryptocurrency?
Another way to look at the global panic is that it’s an opportunity for cryptocurrency and exchanges to grow further. Many more people around the entire world will have to stay at home at least for the next few months. There will also be much more online collaboration than face-to-face meetings.
It could be the perfect time for cryptocurrencies and blockchain applications to step up and prove their worth. People have more time than ever to learn a new way of doing things, and more incentive than ever to try new online collaboration technologies. After all, that’s what cryptocurrency and blockchain were built for.
It’s a very uncertain time for cryptocurrency and exchanges. Currently, there’s good reason to think that many exchanges will survive this global panic unscathed, especially more established ones. In fact, they may well come out of this time stronger than ever!