Bitcoin, which is down 16% from its highs after almost doubling this year, is exhibiting symptoms of weakness as it struggles to attract regular investors, who are considered as critical to its long-term development. According to crypto data tracker TokenAnalyst, as reported in a recent Bloomberg piece, fewer users have been transferring Bitcoin to key exchanges in recent months.
Following a surge in the number of unique addresses transmitting the digital currency to exchanges in 2017, this figure has been declining. The number of addresses transferring Bitcoin to the Bitfinex trading platform is at a two-year low, according to TokenAnalyst statistics. Meanwhile, the number of unique addresses transferring the token to Binance, the world’s biggest cryptocurrency exchange by volume, has also dropped to its lowest level since early 2018.
According to Sid Shekhar, co-founder of London-based TokenAnalyst, the decrease in Bitcoin and other cryptocurrencies indicates a “lack of retail interest in general today in crypto.” “If the ‘Bitcoin as a safe haven in times of recession’ narrative is correct, the number of new users/buyers should be growing.” Instead, Bitcoin trading is controlled by a tiny handful of power investors, who lack the breadth required to sustain the currency’s development.
According to a poll conducted by the Foundation of Interwallet Operability, just 11% of all cryptocurrency holders sent coins as a trade or payment once or twice in 2018.
Offsetting User Declines
Binance, Bitfinex, and other exchanges have tried to draw traffic in order to compensate for a reduction in trading volume. To improve income sources, strategies include increasing customer loyalty, raising rates, and offering additional services. Both Binance and Bitfinex have extended their product offerings to include margin trading, which enables customers to speculate and borrow money. Binance began testing its futures product in September, after enabling traders to lend cash to other dealers in August.
“The more things you provide, the more sticky your customer,” said Jeff Dorman, chief investment officer of Arca, a cryptocurrency asset management located in Los Angeles. “Every customer prefers a ‘one-stop shop.'”
Initial Coin Offerings Boom
Another way bitcoin exchanges keep in business is by enabling initial exchange offers (IEOs).While the ICO bubble has passed, investors are already pouring money into a new method for firms to generate funds using digital tokens.
In contrast to an ICO, digital coins are offered to investors via a crypto exchange rather than directly by a firm in IEOs. In this way, crypto exchanges act similarly to an investment bank in an IPO, doing research on the potential issuer before listing it and providing a report akin to a shorter prospectus. In exchange for this, and for delivering tokens to purchasers, the trading exchange may collect trading fees and a part of the revenue earned once the digital currency starts. According to Bloomberg, the amount for Binance is between 2% and 5% of the funds received. Despite investor skepticism after the failure of several significant ICOs in recent years, some say that exchanges have an incentive to conduct their research before collaborating with a firm.
“Exchanges make a lot of money,” he says. “They have every reason not to slaughter the golden goose.”
Some predict that the trends will force bitcoin exchanges to merge.
According to Bloomberg, “the whole exchange ecosystem is very much fragmented,” said Ian Taylor, head of consulting services at Galaxy Digital Holdings Ltd. “There have been a slew of exchange platforms developed in the recent 6-12 months, each with a somewhat different set of services.” I’d anticipate some form of consolidation to boost user growth over time.”
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