March 26, 2019 Article

3 Factors Behind Declining Trading Volumes in Cryptocurrency Exchanges

The cryptocurrency industry experienced a tough year in 2018 and this seems to be rolling over to 2019. Recently Diar, a crypto and blockchain research-based organization, reported that crypto exchanges trading volumes were at their lowest in January 2019 compared to two years ago.

At the same time Binance, the world’s leading crypto exchange, registered a 40% drop in its bitcoin and US dollars market, as contrasted with December 2018. Other key crypto exchanges across the globe also saw their trading volumes plummet, compared to what they registered at the close of 2018.

Cryptocurrencies are increasingly playing a critical role in the financial market. However, their success will be determined by various factors, including active governance, adoption rates and price stability. It is therefore important to review the key factors that could be driving the decline in trading volumes in crypto exchanges.

1. Cryptocurrency Regulation
Proper regulations are necessary for cryptocurrencies to thrive. Countries around the globe view these digital assets differently. There are those that have taken steps to regulate cryptocurrencies, others have introduced stricter regulations while a few have proceeded to ban their use altogether.

Overall, the decisions that governments make with respect to regulation of cryptocurrencies have a direct impact on the trading of virtual currencies. When regulations are favorable, crypto prices tend to rise and trading volumes soar. On the contrary, when trading of cryptocurrencies is banned or tight regulations introduced, the impact on market prices is negative, leading to a drop in trading volumes.

A good example is the Chinese market where crypto trading volumes were affected by the virtual currency use ban. As such, regulations play a big part in shaping the market either positively or negatively, and users may choose to invest in cryptocurrencies or enter a market either due to tight or better regulations.

2. Usability
The usability of a cryptocurrency determines its value. A digital currency that does not solve real world problems is considered to have less or no value. Consequently, its drops in the crypto market. Bitcoin and Ethereum have higher prices compared to other cryptocurrencies due to their high utility.

According to Joseph Oreste, founder and CEO of Qupon, regulation and usable crypto projects are needed to improve trading volumes in crypto exchanges.

He says, “I think we have gone from the very speculative overbought 2017 highs to the oversold lows of 2019. During the consolidation we also needed to see more regulation in the space and some excitement from projects that are actually having some consumer adoption success. I think that is what is missing right now. If regulation around the new effort for security tokens takes off and we start to see trading exchanges for these securities combined with some success stories from some of the existing projects then that will be very positive for the crypto space."

In terms of developing usable cryptocurrencies, Qupon is already putting up a platform for advertising discounts.

"Here at Qupon, we are building a global platform where merchants can advertise discounts on goods and services as digital assets on blockchain technology. Utilizing a shared distributed ledger we can offer merchants dramatically lower fees than centralized coupon provider platforms today. Projects that attract consumers to crypto are going to be a key driver in future growth of distributed technology. Where the consumers go investing dollars are not far behind," Oreste adds.

3. Market Forces
The supply and demand of cryptocurrencies is the other factor that determines trading volumes in exchanges. If a digital currency token is in high supply and its demand is low, its value declines. Equally, if a digital currency is in low supply and the demand from users is high, its value increases. This is especially true with bitcoin whose trading volume can be linked to its demand and supply.


 
 Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.