By Awanish Rajan
Cryptocurrencies and their underlying technology, the blockchain, have paved the way for many new businesses across the globe. Cryptocurrency exchanges, where trading in Bitcoin and other virtual currencies take place, form an integral part of this business economy.
There are numerous issues pertinent to these exchanges that are noteworthy for anyone looking to enter the digital currency space.
RBIs circular in April prohibiting banks from offering services to businesses engaged with crypto-currencies has prompted these exchanges to reconsider operations. Some of the Indian exchanges are shifting out of the country. Many exchanges have begun offering trading of crypto pairs, so that even if accounts are blocked and no rupee can be deposited or withdrawn, trading can still continue.
Crypto-currencies are digital in nature, relying on cryptographic encryption to regulate the generation of units of currency and verification of the transfer of funds, operating independently of a central bank.
At its core is the blockchain technology, a distributed database that is immutable and does not rely on third party to verify new entries but on the network of all those who each have the exact public copy of all the records.
Despite many advantages, due to the digital nature of crypto-currencies, there are ways that allow hackers to exploit systemic vulnerabilities of these exchanges, and thus even if a crypto-currency like Bitcoin itself is secure, exchanges, where it is traded, are prone to cyber-attacks.
Users funds are stored in crypto-currency wallets and digital wallets that allow sending, receiving and storing of virtual coins such as Bitcoins.
If this digital wallet is connected to internet, it is termed as a hot wallet while storing coins in a digital wallet offline is referred to as storing in a cold wallet.
In the wake of some hacks, exchanges store the majority of funds offline while taking preventive measures to protect hot wallets. Many have even taken out insurance against their hot wallets.
Many traders who have migrated from traditional trading to crypto markets have reported lack of choices in terms of trading instruments. Exchanges are beginning to provide crypto indices and derivatives (a contract between two parties that specifies conditions under which payments are made between two parties) like futures contracts, but unlike traditional securities markets, there is no consolidated marketplace with a wide variety of crypto-based financial instruments.
Exchanges have also come under fire for their poor customer support. Especially in aftermath of hacks or suspension of services, a large number of crypto users have aired their grievances on social media like Twitter about bad customer support.
Reddit, another social media site, is filled with complaints against even the biggest crypto-exchanges, with many users citing total lack of response from the exchanges at times.
Investing in crypto-currency is like hedging your net-worth against fall of the dollar imperia, which can be assumed by the large population and can inevitably happen at same time. Most importantly, we support social vision behind crypto-currencies that is a free and hard money for the whole world.
Despite the seemingly negative trends, good projects are still present in the landscape pushing out innovative products. And for many startups, ICOs have provided a route to make their products a reality, something they may not have been able to do with traditional funding involving investment firms and VCs.
For those unfamiliar, Initial Coin Offering is a form of crowdfunding where companies sell coins or tokens to the public to raise capital and fund their project development, while buyers purchase said the crypto-currency at very low rates in hopes that once the business takes off, their returns on initial investments will be huge.
The greatest advantage of ICOs is that even retail investors with modest amounts can participate in them. By April this year, nearly $6.3 billion had been invested in ICOs, exceeding the total investments made in ICOs for the entirety of 2017.
Venture capitalists and hedge funds are backing many ICOs. Retail investors willing to take some risk and ready to do due diligence should not shy away from ICOs. Like any investment, ICOs are not risk-free and many projects some of these can be even outright scams.
(Awanish Rajan is founder and CEO of IDAP Global. Views are his own)
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