Star cryptocurrency Bitcoin, down 16% off its highs after nearly tripling this year, is showing signs of cracks as it fails to attract the retail investors seen as key to bolstering its long-term growth. Over the recent months, fewer people have been sending Bitcoin to major exchanges, according to crypto data tracker TokenAnalyst, as outlined in a recent Bloomberg report.
Following a spike in the number of unique addresses sending the digital coin to exchanges in 2017, that number has been falling. According to the TokenAnalyst data, the number of addresses sending Bitcoin to the Bitfinex trading platform is at a two-year low. Meanwhile, while the number of unique addresses sending the token to Binance, the world’s largest crypto exchange by volume, also fell to its lowest level since early 2018.
The decline for Bitcoin and other cryptocurrencies signals a “lack of retail interest in general currently in crypto,” according to Sid Shekhar, co-founder of London-based TokenAnalyst. “If we go by the ‘Bitcoin as safe haven in times of recession’ narrative, the number of new users/buyers should actually be increasing.” Instead, Bitcoin trading is being dominated by a small group of power investors, lacking the breadth to support the currency's growth.
Just 11% of all cryptocurrency holders were sending coins as a trade or payment once or twice in 2018, per a survey by Foundation of Interwallet Operability.
Offsetting User Declines
Binance, Bitfinex and other exchanges have attempted to attract volume to offset a drop in trading volume. Strategies include taking steps to boost user loyalty, increase fees, and offer more services to increase revenue streams. Binance and Bitfinex have both expanded their offerings to include margin trading, which allows users to speculate and borrow funds. After allowing traders to lend funds to other traders in August, Binance launched the test of its futures product earlier in September.
“The more products you offer, the more sticky your client,” explained Jeff Dorman, chief investment officer at Los Angeles-based Arca, an asset manager that invests in cryptocurrencies. “All consumers prefer a ‘one-stop shop.’”
Initial Coin Offerings Boom
Another means by which cryptocurrency exchanges are staying in business is facilitating initial exchange offerings (IEOs). While the boom in initial coin offerings (ICOs) is long gone, investors are now pouring money into a new way for startups to raise money with digital tokens.
As opposed to an ICO, in IEOs, digital coins are sold to investors through a crypto exchange, as opposed to directly by a startup. In this sense, crypto exchanges assume a similar role that an investment bank would in an IPO, and takes the responsibility of researching the prospective issuer before listing it and offering a report similar to a shorter prospectus. In return for this, and for distributing tokens to buyers, the trading exchange can earn trading fees once the digital coin launches, and receives a cut of funds raised. For Binance, the amount is between 2% to 5% of the sums raised, per Bloomberg. Despite caution among investors after many major ICOs failed in recent years, some argue that exchanges have an incentive to do their homework before partnering with a startup.
“Exchanges are making a ton of money,” he said. “They have every incentive not to kill the golden goose.”
Some expect the trends to pressure cryptocurrency exchanges to consolidate.
“The whole exchange landscape is very much fragmented,” said Ian Taylor, head of advisory services at Galaxy Digital Holdings Ltd., per Bloomberg. “There’s been a lot of exchange platforms launched in the last 6-12 months, all offering slightly varying sets of services. What I’d expect to see over time is some sort of consolidation to bolster user growth.”