Data unveil who’s winning the crypto trading game

As hot as the cryptocurrency market is these days, competing as a marketplace isn’t always easy — even during a year of bull runs.

Recently, both Robinhood (HOOD) and Coinbase (COIN) rocked their shareholders by releasing third quarter results that fell well short of expectations. Yet the platforms have potentially gained major volume boosts during the current quarter, making it a good time to ask which ones are winning the crypto exchange game this year.

Most cryptocurrency exchanges don’t report earnings because they aren’t public companies, but a new study by blockchain forensics firm Chainalysis, reveals a bit about what it takes to get ahead in this competitive trading segment.

Over the past year, crypto exchanges on a growth path shared a few common traits: they’re larger, more innovative and offer more digital assets than their competitors. Based on that criteria, bigger players like Binance, Coinbase and FTX are at or near the top of crypto trading’s league table, Chainalysis found.

According to Chainanalysis data, the landscape of crypto exchanges has been shrinking since July 2020. And, as in other sectors, the consolidation has been characterized by larger players increasingly growing their businesses faster than smaller counterparts.  

By tracing value sent to more than 1500 crypto exchanges over the past year, the study divided exchanges into different segments based on business model and size. Those segments included over-the-counter (OTC) brokers, peer-to-peer (P2P) exchanges, high risk exchanges (HRE), centralized exchanges, decentralized exchanges and derivatives exchanges.

Crypto exchanges by business model

Over-the-counter (OTC) brokers like Circle, ItBit and Genesis Trading provide a more personal touch for higher spending customers. This type of exchange service happens behind closed doors, and caters to investors intent on buying and selling large amounts of cryptocurrency — meaning they need a lot of liquidity.

Peer-to-peer (P2P) exchanges, on the other hand, serve the easiest way for the unbanked to trade. Platforms like Local Bitcoins, Paxful and India’s Wazirx provide the most accessible entry point for people within communities that are underserved by the broader financial system, according to Chainanalysis. Unlike OTC brokers, P2P exchanges aren’t necessarily responsible for trades between customers on their platforms. 

Chainalysis classifies high risk exchanges as crypto marketplaces with minimal “Know-Your-Customer”(KYC) requirements, and this market segment is the true Wild West of the crypto exchange world. Favored by investors intent on safeguarding their privacy, the lower regulatory requirements can also mean this type of exchange tend to be less credible and more risky.

Meanwhile, centralized exchanges provide the most commonly known exchange service for people looking to invest in cryptocurrencies. This segment includes some of the biggest exchanges by transaction volume such as Binance, Coinbase, Gemini, Huobi, Kraken, and Okex. 

This cohort can be split into two different segments: crypto-to-fiat (C2F) and crypto-to-crypto (C2C); the latter doesn’t allow investors to cash their money out into fiat currencies.

Apart from the strength of scale which both Coinbase and Robinhood benefit from to some extent, the study found that decentralized exchanges and derivatives exchanges grew faster this year than any other type of business model based on money received. 

Derivative exchanges such as Binance, FTX, ByBit and Deribit, primarily offer leveraged crypto products where customers can enhance their gains or loses, by borrowing money to purchase futures or options contracts. 

For derivative exchanges and large crypto-to-crypto centralized exchanges, customers trade stablecoins more than any other asset. 

Large decentralized exchanges (DEXs) also receive a significant portion of received value (more than 20%) from stablecoins, and act as market hubs where DeFi tokens can be traded and swapped — sometimes in sophisticated combinations that involve lending. Just after derivatives exchanges, large DEXs saw some of the highest growth between August 2020 and August 2021.

By itself, the DeFi exchange protocol Uniswap carries a current balance of $90.89 billion in assets, with over $101.78 billion worth of volume traded in the last seven days. 

Though technically decentralized, Uniswap Labs, the protocol’s closest caretaker, has a head count of less than 50 employees, meaning its incredibly nimble when compared to major centralized exchanges like Coinbase, Robinhood and Binance, which all have at least 1200 employees.

Finally, Chainanalysis suggests that a larger number of crypto assets also “plays a big role in an exchanges’ survival rate.” Though many exchanges that offer fewer assets still show high volumes, offering a greater variety of assets appears to correlate with receiving above average monthly received value.

However, the risk of listing newer crypto assets also depends on weighing the regulatory hurdles and investor risks associated with vouching for lesser proven assets.

At Yahoo Finance’s recent “Crypto Goes Mainstream” conference with Decrypt, Robinhood COO Christine Brown addressed the issue, as more of their customers have requested the online trading platform and crypto exchange to list digital coins like the wildly popular Shiba Inu.

Unlike other centralized exchanges such as Binance, or Coinbase — which has listed more than 30 new tokens in 2021, Robinhood is taking a more cautious approach Brown said at the event, instead choosing to back more time-tested assets such as Bitcoin, Ethereum and Litecoin.

The Chainalysis study found the fastest growing exchanges still devote most of their volume to Bitcoin (BTC-USD) and Ethereum (ETH-USD).

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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