The biggest challenge for crypto exchanges is global price fragmentation

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

Nonetheless, it appears nearly 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 completely different exchanges. With elevated competitors, the stress for Coinbase and exchanges around the globe to decrease charges is mounting. However, the largest pricing subject going through Coinbase and different exchanges is much higher than merely payment buildings.

Commoditization and worth

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

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

Associated: Crypto needs a decentralized daily reference rate

Nonetheless, this view of Bitcoin belies an underlying drawback inside the market. The worth of Bitcoin just isn’t a static quantity and might usually range throughout exchanges. Due to market fragmentation, customers are sometimes over or underpaying with out even figuring out it.

Fragmentation and true worth

Market fragmentation happens when contact and interplay between exchanges are poor. This leads to variations in pricing between exchanges and a dearth of liquidity out there at massive.

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

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

If the value of Bitcoin is $60,000 and the payment is 0.50% on one alternate, one might pay for a Bitcoin on one other alternate at $60,120 with a 0.30% payment. Sure, with tons of of exchanges out there, the value hole can get this massive at instances. 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 worth.

The largest subject this causes, nonetheless, is that Bitcoin is not a commodity. With too many pricing variances, Bitcoin turns into nonfungible, and the market stagnates. This movement away from commoditization will ultimately trigger a possible market implosion. However there’s hope for change.

Market stabilization

Any such market chaos just isn’t new nor remoted to the cryptocurrency market. The identical points have occurred in bonds and equities markets, however have been solved over time by regulation. For instance, the US Securities and Trade Fee has a coverage referred to as Nationwide Finest Bid and Provide, or NBBO. This regulation requires all brokers to execute trades at one of the best accessible ask worth nationally when an investor needs to purchase a safety, and one of the best accessible bid worth nationally when an investor needs to promote.

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

The cryptocurrency market, nonetheless, 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 completely different costs primarily based on these exchanges.

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

Constructing a very unified world crypto market

The foundation reason behind the problem out there is an absence of communication or interoperability between exchanges, leading to a excessive diploma of market fragmentation. Nonetheless, the present digital infrastructure is substantial sufficient to assist fixed alternate interplay. However for markets to scale globally, this interoperability between exchanges have to be seamless.

Associated: Trustless bridges may be the key to blockchain interoperability

Bitcoin is a worldwide 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 supply at any given time, because the NBBO offers for conventional equities. Extra enterprise-grade applied sciences and liquidity may also assist mature digital asset buying and selling. All of this might ultimately enable for one unified world buying and selling market in an identical manner that conventional shares are traded on exchanges just like the Nasdaq or the NYSE.

With out these options to cut back fragmentation, buying and selling payment arguments and debates are misdirected and don’t inform the entire story. It’s time to degree the taking part in subject of equity with the correct regulation and know-how in place. In the end, it’s not a race for decrease buying and selling charges, it’s a race for one thing just like the NBBO in crypto — a very world greatest bid and supply.

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

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