The biggest challenge facing cryptocurrency exchanges is global price fragmentation

It is no secret that Coinbase has played an important role in bringing new users into the crypto space. Coinbase’s friendly onboarding process and listed company status make it a more traditional investment platform for non-crypto-savvy investors, thereby gaining greater trust.

However, another article about Coinbase and its high fees for retail and professional traders and investors is posted on the Internet almost every week. Complaints usually follow the comparison of pricing between several different exchanges. As competition intensifies, Coinbase and exchanges around the world are under increasing pressure to reduce fees. Nonetheless, the biggest pricing problem faced by Coinbase and other exchanges goes far beyond simple fee structures.

Commoditization and prices

Commodities are replaceable commodities. In other words, the market treats goods of various appearances as effectively equal. When goods or services are commoditized, there is no further distinction between sellers, and all negotiations are based solely on price.

The discussion about transaction fees is rooted in the belief that the price of a cryptocurrency is static on all exchanges-a commodity. If Bitcoin (Bitcoin) Is a real commodity, transaction costs will be the only issue, and discussions around Coinbase’s fee structure will be effective.

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However, this view of Bitcoin masks a potential problem in the market. The price of Bitcoin is not a static number and usually varies from exchange to exchange. Because the market is fragmented, consumers often pay more or less unknowingly.

Fragmentation and real prices

When the communication and interaction between exchanges are not good, market fragmentation will occur. This leads to pricing differences between exchanges and a lack of liquidity in the entire market.

When these prices differ greatly, they will quickly include any difference in fees between exchanges. Investors and traders have received training and can only see prices on a single exchange. But this fragmentation means that the true price of any cryptocurrency is its price on a single exchange plus that exchange’s fees, compared to the same calculation on another exchange.

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If the price of Bitcoin on an exchange is relatively low, it does not matter whether the exchange charges zero fees. Why?

If the price of Bitcoin is $60,000 and a fee of 0.50% is charged on one exchange, then people can buy Bitcoin at a price of $60,120 on another exchange and charge a fee of 0.30%. Yes, there are hundreds of exchanges in the market, and the price gap can sometimes become so large. This difference has led to a surge in arbitrage investment—buying bitcoin at a lower price in one exchange, and then reselling the same bitcoin at a higher price after transferring to another exchange.

However, the biggest problem this has caused is that Bitcoin is no longer a commodity. Due to too many pricing differences, Bitcoin has become irreplaceable and the market has stagnated. This movement away from commercialization will eventually lead to a potential market implosion. But there is hope for change.

Market stability

This type of market chaos is not new, nor is it isolated from the cryptocurrency market. The same problem appeared in the bond and stock markets, but over time it was resolved through regulation. For example, the U.S. Securities and Exchange Commission has a policy called the National Best Buying and Selling Price, or NBBO.The rule need When investors want to buy securities, all brokers execute the transaction at the best selling price in the country, and when investors want to sell, execute the transaction at the best buying price in the country.

In this way, regulation stabilizes the market and protects consumers from paying excessive fees on any given exchange. Brokers are controlled and market forces cooperate rather than operate unilaterally.

However, since the cryptocurrency market is still in its infancy, there is no time for normalization. The operation of exchanges has relative autonomy, and the current fragmentation of the market means that retail investors and institutional investors usually pay different prices based on these exchanges.

The problems with implementing this system in the cryptocurrency market are multifaceted-lack of communication, strict regulatory compliance and dry liquidity pools prevent any meaningful change.

Build a truly unified global crypto market

The root cause of market problems is the lack of communication or interoperability between exchanges, which leads to a highly fragmented market. However, the current digital infrastructure is sufficient to support continuous communication and interaction. But for the market to expand globally, this interoperability between exchanges must be seamless.

related: A trustless bridge may be the key to blockchain interoperability

Bitcoin is a global asset, arguably more important than Apple or Tesla stocks. Therefore, it is unfair for traders to be unable to obtain the best bid and ask prices at any given time, because NBBO provides services for traditional stocks. More enterprise-level technology and liquidity will also help mature digital asset transactions. All of these may eventually establish a unified global trading market in a manner similar to trading traditional stocks on exchanges such as Nasdaq or the New York Stock Exchange.

Without these solutions to reduce fragmentation, disputes and debates about transaction costs will be misled and cannot tell the complete story. Now is the time to balance a level playing field through proper regulation and technology. In the final analysis, this is not a competition to reduce transaction fees, but a competition similar to NBBO in cryptocurrencies-the true global best bid and bid.

This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.

The views, thoughts, and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Haohan Xu He is the CEO of Apifiny, a global liquidity and financial value transfer network. Before joining Apifiny, Haohan was an active investor in the stock market and a trader in the digital asset market. Haohan holds a bachelor’s degree in operations research from Columbia University with a minor in computer science.