Cryptocurrency exchanges have been in the headline in 2021 thanks to the IPO of Coinbase (COIN) in New York and, more recently, regulatory scrutiny of Binance, one of the biggest and fastest-growing private exchanges.
Exchanges form a key part of the cryptocurrency landscape, much like they do in the stock market. The cryptocurrency market is generally accessed through online exchanges where traders can buy or sell using deposits of fiat currency from debit or credit cards.
Unlike public equity markets, where national exchanges dominate, the crypto exchange landscape is less obvious from the outside.
When the ecosystem was in its infancy, purchasing bitcoin (BTC-USD) was a daunting task. Only the truly persistent managed to transfer funds to obscure exchanges such as Japan’s Mt.Gox, which was founded in 2010. Purchasing crypto on this early exchange involved funnelling money through an intermediary in Cyprus called OKPAY. Mt. Gox ultimately went bankrupt in 2014 after a catastrophic hack — a cautionary tale that has led many crypto-veterans to look upon today’s exchanges with wary eyes.
Today, the top five crypto exchanges in order of trading volume are: Binance, Huobi Global, Coinbase, Kraken, and FTX. Each of them turns over billions of dollars in trade each day.
Exchanges in this new and relatively unregulated industry come in two forms: centralised exchanges (CEXs), such as Binance, where you entrust your coins and passwords to a third-party company; and decentralised exchanges (DEXs) such as Pancake Swap, where there is no involvement from a central authority and users remain in full control of their private keys and digital assets.
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Most of the top exchanges, apart from Binance and FTX, report ethereum as their number one cryptocurrency by volume. Binance and FTX list bitcoin as their most-traded asset.
Exchanges typically differentiate themselves through the services offered to users. Binance is renowned for the speed of its transactions, Coinbase for its user-friendly interface, and FTX for its array of crypto-derivatives.
Cryptocurrency exchanges also differ from each other in the fees they charge and in how seriously they take security. Exchanges don’t offer nationally-backed deposit insurance, such as the Federal Deposit Insurance Corporation (FDIC) in the US or the Financial Services Compensation Scheme (FSCS) in the UK. However, some exchanges provide insurance against theft or exchange failure.
Perhaps the most trusted exchange is Coinbase. The business is publicly listed on the NASDAQ (^IXIC) and based in the US, which means it faces a high level of regulation. Coinbase has a custody service that provides insurance against exchange hacks. Additionally, the exchange’s US customers have their dollar holdings protected by “pass-through FDIC insurance” of up to $250,000 per individual.
Activity on Coinbase is dwarfed by that on Binance, the world’s largest cryptocurrency exchange. Binance’s daily trading volume of approximately $11 billion is almost ten times larger than Coinbase. The exchange is notable for the large number of coins it lists and its low transaction fees. Investors can trade 372 different coins and tokens on Binance, compared to only 74 of Coinbase.
Since 2018, Binance has offered customer protection through its Secure Asset Fund for Users scheme, which offers partial reimbursement of user’s assets if the exchange is hacked and is funded through trading fees.
Binance recently made headlines for its problematic relations with regulatory authorities in…