The Crypto Oligopoly of Crypto Exchanges

Centralization of power in crypto exchanges is inevitable.

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In this next crypto winter, I expect a consolidation of the top exchanges to occur.

What I see most likely occurring in the U.S. is simple, I see the top 8 globally becoming a top 2 or maybe 3 in the U.S.

It’s pretty easy to tell which ones are the chosen:

1. Binance

2. FTX

3. Maybe Coinbase (though I wouldn’t bet on it).

I believe these 2-3 will continue to take marketshare from the 4-8 ranked.

Like any other area of U.S. innovation, typically a duopoly emerges after a little more than a decade. While crypto and Web3 was once nascent, that’s no longer the case. Bitcoin bull markets are mainstream now in 2022. So who stands the most to lose?

I found a good ranking on coinmarketcap.com here. Centralization of crypto trading and its future means significant crypto Tycoons are emerging, like the heads of FTX and Binance, in particular.

I do not see folk like Kraken, Gemini and company competing at least in the U.S. in the long-term. This also stems from real innovation.

Recently, Binance.US dropped its spot bitcoin trading fees. Coinbase’s stock was literally down due to this.

Think about it, Coinbase has crazy high fees! It’s not even competitive.

Binance.US, the U.S. affiliate of the largest crypto exchange in the world by trading volume, said it will allow users to make spot bitcoin trades for the U.S. dollar and stablecoins tether, USD Coin and Binance USD without paying spot trading fees.

This is sort of a big deal.

While Binance doesn’t do regulation that well, it’s too big to fail. I wrote about its founders real net-worth recently and I was shocked. Crypto isn’t decentralizing money, it’s centralizing a whole new breed of Tycoon. I’ll mention however “decentralized” you think Bitcoin, crypto and blockchain are, there’s literally no chance Binance has not had support from the CCP.

Consolidation of crypto trading is too lucrative for China not to have intervened into. Binance likely has ties that you would not ordinarily expect, as of course do many companies in Singapore and people who were born or have significant family in China itself. This is not very shocking, but the lack of transparency in crypto is.

I believe Binance and FTX can significantly outperform Coinbase in the long-term where the majority of trading takes place on one of those two crypto trading platforms. If I had to pick the winners, those would be them.

So how does a crypto winter actually increase the process of consolidation? Last weekend, bitcoin hit a new 2022 low, falling below the $18,000 level for the first time since December 2020. As a result of the continued declines, trading volumes on crypto exchanges have been sliding. Binance U.S.’s move is very smart and strategic.

Coinbase is Getting Desperate

Coinbase historically has relied heavily on trading volumes for revenue but in recent months has been looking to diversify its revenue streams. It is currently testing a subscription service for customers called Coinbase One that would give them access to zero-fee trading for up to $10,000 in transactions a month.

You already have high trading fees bro, now you want us to pay a Subscription? Haha no thanks. Coinbase’s NFT marketplace sought to be the Instagram for NFTs, but their launch was too late, I’m not sure what their product people or C-suite were thinking.

As Bitcoin went mainstream, it slowly becomes a zero sum game for all of these exchanges. Think about it, the zero-fee trading phenomenon, first introduced by Robinhood, began putting a dent in the retail investing world a few years ago, when major stock brokerages shifted to commission-free online trading, including Charles Schwab, Fidelity Investments, E*Trade Financial, Ally Invest, and Interactive Brokers.

It’s not clear how Coinbase can compete with FTX or Binance in the long-term.

There are more than 300 crypto exchanges that specialize in crypto only, without including apps and platforms that mix stock and other assets with crypto trading. There are more than 5000 cryptocurrencies to trade as per the data by CoinMarketCp. Each crypto winter there’s significant demand destruction. Coinbase significantly over-hired in 2020 and 2021 and even the first half of 2022.

Crypto for all its decentralization dogma, is an incentive for the ultra rich to game the system. And it’s really easy to game in the 2020s. You don’t even need gimmicks like ICOs or NFTs, truth be told. It’s all in the volatility of the spikes and downfalls.

Why Zero Commission Trading Creates a Zero Sum Game

I predict by 2030, we will see considerable centralization of crypto trading in just a few eventual winners in a winner-takes-all scenario. My picks currently are Binance and FTX, though there may be a few outside winners still.

Will Block or Crypto.com be able to create a Super-app or someone else? I don’t think it will be Coinbase, due to their high-fees and Silicon Valley mechanics.

Last month, crypto exchange FTX US, revealed plans to roll out zero-commission stock trading (CNBC). Block’s Cash App, SoFi and Public all also offer trading in both stocks and crypto. However I don’t see Robinhood or SoFi being able to pull it off very easily, as good as those apps are.

I see FTX as a surprising winner here in the U.S. market. I wouldn’t have said that even three years ago. What do you think?

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