Second-Tier Exchanges Are A Vital Part of Crypto Ecosystem

Source: Adobe / Azaliya (Elya Vatel)

Everyone has heard of it Coinbase, Binance, Cracking and other major exchanges, but few of us can name one or more of the so-called “second-class” exchanges. These are smaller exchanges that don’t make headlines or trade huge volumes, and given that they are largely self-distinguishable, it’s hard to imagine most of them surviving in the future.

However, traders and experts working within the industry believe that there is room for smaller, second-rate exchanges and that the best of them offer things that larger exchanges don’t. So while many smaller exchanges may drop in the coming years, there will be a harder core of other second-tier exchanges that survive and help make the exchange sector more competitive.

What are they?

Currently CoinMarketCap list 341 cryptocurrency exchanges, although more than 500 are listed in other folders.

That’s a lot, and even with the more successful second-rate exchanges, there is a suspicion that they don’t really do anything to set themselves apart from bigger rivals. As Multicoin CapitalMable Jiang wrote in a recent tweet:

Yes, it may be hard to see why a smaller exchange that does nothing else or better would survive with larger rivals. Nevertheless, most analysts and traders confirm that the better second-line exchanges do offer services that you cannot easily find elsewhere.

“Some second class exchanges have found opportunities in OTC (over the counter) and other services that provide some differentiation,” said Simon Dingle, founder of Inves Capital and author of In Math We Trust.

Dingle in particular tells that second tier exchanges often offer trading opportunities in a larger pool of coins and / or in coins not listed by other exchanges.

“Offering boutique and niche services, such as arbitrage in markets where such opportunities exist, has been very lucrative for some of the smaller exchanges that know what they are doing, such as Ovex. ‘

In addition, Dingle notes that many of the best second tier scholarships are local scholarships, offering services only in certain countries that are more tailored to local needs and requirements.

Likewise, Mico Jiang of Multicoin tells Even though, for second-rate exchanges, it is difficult to compete with major platforms in terms of mature products such as spot trading, there is “plenty of room for new product innovation”.

“For example, we observed the traction that FTX gained when it first launched lever tokens and some ETFs,” she explains.

Likewise, a second-line exchange in China called offered bot trading products to its users to hedge their risk against market volatility; they too achieved significant organic growth despite zero marketing efforts. ”

Jiang also confirms that the opportunities for second-rate exchanges can be found in derivatives, options and products with advanced trading strategies.

Ethics, transparency, simplicity

Simply put, some analysts and commentators believe that second-rate exchanges differ from the big boys simply by providing a more transparent and ethical service.

“Honestly, the most important thing is not to be so scammer,” said Jimmy Song, a venture partner with Blockchain Capital and a Bitcoin developer / educator. “Most top-level exchanges do very dark things like a fee for listing, which I think has done quite a lot of damage to the industry.”

In addition, some make things easier by focusing on just one or two cryptocurrencies, or by introducing a simpler fee structure.

“I’ve seen some exchange startups do different things that set them apart, such as the fact that they are only Bitcoin (Swan, Cash app) or with a different fee structure (LevelSongs

On the other hand, some experts also think the opposite. That is, some second-rate exchanges attract customization because their small size and under-regulated nature means coins can rise in price dramatically.

“The only advantage they have compared to the big brothers is that they are too small to be on the radar so they can be ‘wilder’,” said Anndy Lian, a Singapore-based cryptocurrency and blockchain advisor and author.

“You rarely see a coin going 100x on major exchanges, but it still happens on second-rate and small exchanges.”

Of course, wild price swings and a lack of liquidity (or transparency) may not be a good long-term strategy for survival. Jimmy Song even suspects that regulation may be the reversal of many second-rate exchanges in the future.

“The biggest problem at the moment is that incumbents, especially in the US, are using their regulatory powers to their advantage. They are not ahead of technical innovation, they are ahead of regulatory compliance. This is a sad situation, because the best innovations don’t win. ”

The future: consolidation?

Given that Binance and Coinbase are expanding internationally, analysts believe that some degree of consolidation in the exchange sector is inevitable.

“If there are a handful and they don’t differentiate in terms of product offering, there is likely to be some consolidation among them,” said Mable Jiang.

Also, she says, it is less flexible for large trade shows to try out new products given the size of their customers, but second shows can be more agile in testing different innovative products.

Jiang believes that the best second-class scholarships will find a place for themselves for some time to come. This is mainly for two reasons:

  1. providing local on / off-ramp services,
  2. a list of small-cap cryptocurrencies that the larger exchanges may have missed.

Learn more:
Will “No KYC” exchanges survive in a regulated crypto industry?
Crypto-Exchange Trends for 2020 and the Next Decade

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