Social media is erupting with stories of cryptocurrency traders paying insanely wide spreads on cryptocurrency exchanges. In one exchange, Lee, a new Bitcoin trader, laments losing 35 percent of his funds on one Euro-to-Bitcoin trade, after being lured by promises of no fees and a free debit card to a new exchange. Speculators who dominate the cryptocurrency market thrive on the attractive arbitrage opportunities in the high volatility crypto markets. Commercial hedgers, however, who cover currency exposure as part of their risk management strategy will avoid the present wild ride.
The cryptocurrency market, like any developing trading exchange, suffers from low liquidity. Low liquidity not only increases opportunities for market manipulation but also the risk of traders not being able to complete trade execution, owing to a low number of counterparties. Market manipulation and hacking are indeed increasing on cryptocurrency exchanges, observes QUOINE, the Tokyo-based cryptocurrency trading and futures exchange.
The more liquid a market is, the tighter the spreads will be. In the current low liquidity market, it’s not uncommon for some cryptocurrency exchanges to take 10 percent or more of a trade, through large spreads and fees. This compares to an average spread of 0.70 on the popular EUR/USD currency pair in the fiat world.
Missing Link in crypto trading
Liquidity is the missing link in the Blockchain-powered crypto economy. Currently, over 100 active cryptocoin exchanges with a daily volume of $1.8 bln divide the market in Bitcoin, Ethereum and other cryptocurrencies. It’s small change compared to the $5.1 tln traded daily in fiat currencies in the decentralized foreign exchange market, which is also made up of many trading platforms, although the high liquidity in the major currencies and arbitrage ensures price is very close across markets.
Cryptocurrency exchanges, on the other hand, offer have very different levels of efficiency—measured by liquidity, spreads and transaction fees paid. The solution is a global liquidity platform (aptly called LIQUID) that links up all cryptocurrency trading, says QUOINE, whose crypto exchange is linked to most major exchanges. QUOINEX, a regulated crypto and fiat currency exchange, conducts about $12 bln in annual transactions across 50 currency pairs.
Ecosystem for the crypto economy
While QUOINEX has developed into one of the most liquid markets in cryptocurrencies, liquidity among the loose collection of cryptocurrency exchanges is still low. To provide global liquidity in cryptocurrencies, QUOINE LIQUID plans to unite all siloed liquidity pools, fiat and crypto currencies under one order book, the World Book. The LIQUID Platform prime brokerage services increase liquidity by providing direct market access, fiat/crypto credit for margin trading and fiat cash management—an attractive liquidity source for third party liquidity providers.
A challenge for the expansion of crypto exchanges is that cryptocurrencies lack a central authority or owner, and therefore cannot act as traditional collateral or security. New exchange models are emerging to address this shortcoming. Legolas, for example, is providing cryptocurrency trading over the Blockchain, with financing through Luxembourg bank BankQix to safely facilitate deposits and withdraws. QUOINE’s solution is to back its liquidity market with its own currency QASH, through an upcoming initial coin offering.
Liquidity is important to creating a market in which hedgers can cover their currency exposures. In most fiat currency markets, commercial trading volume is higher than non-commercial trading volume. Most cryptocurrency is used in speculative trading, but the productive side of the crypto economy could develop quickly.
Real crypto economy
Initial coin offerings will help create liquidity. ICOs are introducing hundreds of new custom tokens, upon which productive businesses are being developed. Alongside speculative trading, the demand by token issuers and holders to hedge these exposures will quickly develop. Emerging on the Blockchain are traditional businesses, from travel booking to commercial shipping services, and new ones, from peer-to-peer financial services to virtual reality social media platforms.
QRYPTOS, QUOINE’s new cryptocurrency exchange, now accepts all crypto tokens, providing a place where the token issuers can launch ICOs and secondary offerings, and token holders can trade. In addition to regular trading purposes, imagine a holder of tokens for an airline booking service being able to swap them for tokens for a hotel booking service to upgrade to a premium membership.
In September 2017, QUOINE Corporation became the first global cryptocurrency exchange to be officially licensed by the Japan FSA. QUOINE was well counselled before the recent regulatory crackdown on crypto exchanges in Asia and elsewhere. Advisors include Masaaki Tanaka, senior advisor to the Bank of Tokyo-Mitsubishi UFJ, and a member of the Panel of Experts on FinTech Startups of Japan’s Financial Services Agency; Paul Kuo, the former chairman of the International Bankers Association and board member of the Tokyo Stock Exchange; and Koh Boon Hwee, chairman of private equity fund Credence and a GIC board member, who also serves as the deputy chairman of the Securities Industry Council.
QUOINE co-founders CEO Mike Kayamori — a former SoftBank executive and Silicon Valley venture capitalist — and CTO Mario Gomez Lozada — a software engineer and former executive with Credit Suisse and Merrill Lynch — recognize the need to bring bank-class standards to the cryptocurrency markets. The cryptocurrency exchange applies the IT, regulatory and compliance, and credit standards of global financial institutions.
In 2016, QUOINE raised $18 mln from institutional investors, in addition to an earlier $2 mln angel round. QUOINE’s major investors are steadfast supporters of Blockchain and cryptocurrency ventures. The 2016 funding round was led by Japanese private equity giant JAFCO, whose recent investments include crypto-fintech consultancy and COMSA ICO platform developer Tech Bureau, and the “Lightning Network for IoT” developer Nayuta. Investor Taizo Son, brother of Softbank CEO Masayoshi Son, is backing the QASH Token Sale. Son, an early supporter of Blockchain tech, including artist copyright vault Binded, is also an investor in QUOINE through his Mistletoe VC fund.
QASH token sale
The QASH Token Sale has a target of 500,000 ETH to build liquidity and fund product development and operations. Half of the amount will be used to make deposits in other exchanges, to kickstart the QUOINE global liquidity pool.
The official ICO launch is Nov. 6. Investors participating for the first three days of the sale will receive a 20 percent discount. Participants can only buy QASH tokens through a QRYPTOS account. Sign up at https://qryptos.com. The tokens can be used across all of QUOINE’s exchanges. Ultimately, QUOINE aspires to make QASH a preferred coin for financial services in the crypto economy.
If QUOINE continues to build liquidity, the cryptocurrency traders will come.
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