Behind the Scenes of Cryptocurrency Exchanges: Secrets, Strategies, and More

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Behind the Scenes of a Cryptocurrency Exchange: Secrets, Strategies, and More

The following article is based on insights from the Blockchain Connect Conference in San Francisco. Included in this exchange panel are exchange CEOโ€™s Chris Lee (OKEX), Jesse Powell (Kraken), Mike Kayamori (Quoine), Chief Strategy Officer Kailong Cai (Huobi), and Head of International Markets Ted Lin (Binance Exchange).

โ€œWeโ€™re gonna be a much more prosperous society because we donโ€™t require such a huge drag on our societyโ€ฆ because the blockchain is now that trusted third party.โ€- Tim Draper, American venture capital investor.

Cryptocurrency Trading Demographics

The US, Japan, and China are major cryptocurrency markets. The average trader is male in their 20s and 30s, with females and other extreme age groups entering the market.

OKEX: โ€œ30% of all Koreans are trading crypto.โ€

Huobi: 70% of customers come from China, a lot from Japan, but not much from US. About 50% are 30-50, while the average Chinese investor is 20-30. ย โ€œThe male to female customers 4 months ago was 4:1. Now itโ€™s 3.3:1. So female involvement is growing very fastโ€.

Kraken: Kraken exchange users are mostly male, with a recent influx in both really young (18 years old with little money) and those around 70 years old. ย The average age in mid-30s more and tech-savvy with a bit of money to invest. โ€œLately weโ€™ve seen both of the extremes, teens and people 70+.โ€

Binance: โ€œWe are 270th globally on Alexa, and 70th in the USA. The US is our biggest market, average age 25-35, mostly men.โ€ The ones that are still not in crypto are the midlife crises ones, ages 50-60s, โ€œbut even grandmas are talking about cryptoโ€.

Quoine: Early 20s coming en masse.โ€œWhen I started itโ€ฆ. they were looking for the next excitementโ€. ย Crypto is โ€œbigger than FXโ€ and other assetsโ€“Japanese investors are interested in leverage trading.

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Importance of Cryptocurrency Exchange Security

Individuals need to make sure the exchange they are using makes security a priority, as exchanges are always a target. Moreover, users need to stop posting their cryptocurrency investments on social media.

Kraken: โ€œSecurity is something we think about constantlyโ€ฆ it was at the core of the exchangeโ€ฆ itโ€™s what inspired us to make an exchangeโ€ said Powell. โ€œItโ€™s a marathon, not a raceโ€ฆ saw a lot of prominent members getting their cellphones ported away, people getting kidnappedโ€. Powell continues to warn traders on their personal safety, saying โ€œif you talk about Bitcoin on social media, you should think twice about itโ€.

Binance: โ€œWhen you grow too fast too quickly, you take shortcutsโ€ฆThereโ€™s a tradeoff between customer convenience and securityโ€. Lin makes it clear that some exchanges arenโ€™t taking warning security measures in actual practice. Even with a regulated market in Japan, things still happen, which is why it is โ€œup to each individual to make sure the service provider you are using puts security front and foremostโ€.

Impact of Whales In the Cryptocurrency Market

The exchange leaders tend to agree that there are whales, ranging from medium to heavy influence over the cryptocurrency market. However, there are no market makers with control total control over the market just yet. Investors need to beware of coins with low liquidity as they can be easily manipulated.

Kraken: โ€œThere are definitely whales that are market-makingโ€ฆ. but I wouldnโ€™t say anyone has massive influence over the priceโ€.

Binance: โ€œI would say whales exist, but not necessarily with evil intentionsโ€. Some whales โ€œout to play, some out to arbitrageโ€. Lin continues to say that some whales are โ€œout to play, some out to arbitrageโ€, with less liquid markets like Ripple (which is 60% owned) having โ€œwhales that are market making, doing arbitrageโ€. Ultimately, Lin believes manipulation isnโ€™t too widespread.

Huobi: Whales effect โ€œ70% of Bitcoin positionsโ€.

How do Exchange Choose the Coins They List?

OKEX: The company looks at technology and how large the market is, and if there is โ€œa ceilingโ€ for this market. They also want to know if it is a utility token, and the risks, security, and the characteristics of the technology behind it. Lee says it takes a couple of weeks to a month to list a new coin.

Huobi: Huobi has a credit system called โ€œsmart chainโ€ based on five criterion. This includes the strategy, management team, technology, its market size, and its potential. However, โ€œone thing we donโ€™t share is how we weight these itemsโ€ฆ we donโ€™t want the bad guys to go publicโ€.

Binance: People ask me โ€œwhat are you gonna list next. Itโ€™s become a craze for people to jump on the next big thingโ€. Lin says there are only a few different ways to really understand if you picked the right project. โ€œFor us, we do a very proprietary methodology. Is the team good, do they have good track records, do they have a productโ€ฆ. And do they actually use blockchain technology for real?โ€. He continues to say they like modest teams that donโ€™t seek extravagant amounts of money. โ€œWe pass less than 3% of all applicants in our reviewsโ€ฆ 97% of those are rejectedโ€ states, Lin.

Trends

Bitcoin still is the preferred coin to trade, but altcoins are gaining traction. Thereโ€™s also a slew of entrepreneurs attempting to appeal to the masses by launching ICOs.

Huobi: Before, we saw people trading a lot more. Now we see people holding it.

Quoine: Bitcoin is still the most popular coin. Its popularity is due in part because itโ€™s the largest token in respects to volume as well as the Japanese government calling crypto legal tender.

Binance: Japan is more around Bitcoin, with the altcoin market being very small. This has to due with government regulations, as the government has to approve coins.

The Future of Cryptocurrency Trading

While the cryptocurrency market still looks like the wild west, market manipulation is expected to decrease. Countries should be looking to regulation to help control this manipulation.

Quoine: As the market matures, market manipulation will go down. Overtime, when there are more institutional investors and retail investors, the market will mature and exchanges will have to be transparent about whoโ€™s making markets, and whoโ€™s buying what.

Cryptocurrency Trading Psychology

People need to do better background research on coins instead of just investing based on its value or what the news says.

Kraken: Powell states โ€œitโ€™s scary when you hear some of these strategiesโ€. He believes the news manipulates trading behaviors and thinks it is often dangerous to invest in coins just because they have a less than one cent value.

Binance: New users are often looking to coins with large fluctuations as they find them more exciting and potentially lucrative.

Final Thoughts

As the cryptocurrency world evolves in terms of user adoption and government regulation, cryptocurrency exchanges will be forced to adapt. Many exchanges are making large strategic bets on where they see the industry headed. Running a cryptocurrency exchange requires having nearly sage-level foresight mixed with the grit of being able to run a startup in an extremely fast paced and competitive environment.

Cryptocurrency exchange developments are going to be a very interesting topic to follow in 2018, so stay tuned for more!

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CoinCentralโ€™s owners, writers, and/or guest post authors may or may not have a vested interest in any of the above projects and businesses. None of the content on CoinCentral is investment advice nor is it a replacement for advice from a certified financial planner.