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Analysis & Opinion

Analyst Take: Why Exchanges’ Business Model Is a Strategic Blunder

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Despite reputation damaging heists, cryptocurrency exchanges have been largely successful whilst boosting the liquidity of digital assets.

Despite reputation damaging heists, cryptocurrency exchanges have been largely successful whilst boosting the liquidity of digital assets. However, a market analyst believes that the horizontal business model crypto exchanges utilize is a strategic blunder, and it would cost them in the end.

Horizontal Business Model Will Cost Crypto Exchanges

Vijay Boyapati, a cryptocurrency analyst, is of the view that the current business model exchanges are using will cost them a lot five years down the line. He states that with the horizontal business model, crypto exchange platforms are making a strategic mistake. Instead, he advises them to adopt a vertical business model as it presents a better future for them.

While explaining his points further, Vijay says that crypto exchanges employ the method of listing as many cryptocurrencies as they can. With this arrangement, exchanges draw their profits from listing and trading fees even at the expense of the human labor needed to maintain each asset wallet.

However, he reveals that there is an opportunity cost in this business model. The exchanges need to dedicate engineering time to ensure that the crypto projects are free of bugs, Trojan horses, and not prone to a 51 percent attacks. Also, they have to deal with distinctive blockchain APIs. This means that exchanges are stretching their resources just by listing numerous cryptocurrencies on their trading platforms, and in some cases, the cryptos won’t be around five years from now.

Vertical Business Model Is the Solution

Instead of stretching their resources by listing several cryptocurrencies, Vijay advises exchanges to devote their time and resources to pursuing a vertical business model. This model will see them work on the financialization of the leading cryptocurrency, Bitcoin. He assures them that the long-term opportunity in this business strategy is truly massive.

By building upon a single crypto, exchanges would save engineering time and can use their efforts to work Bitcoin. Thus, allowing them to provide much-needed services such as margin services, shorting, futures trading, and collateralized derivatives.

Vijay further notes that the hardest part of this is the regulatory burden the cryptocurrency exchanges would feel when they adopt this business strategy. However, he assures them the effort is worth it in the long run.

To support his point, Vijay provided data stating that BitMex has already proven the size of the market with the Bitcoin collateralized derivative products they offer. Furthermore, a significant fraction of market volume occurs on BitMex, and it can be argued that most price discovery for the most liquid cryptocurrency happens via BitMex. Thus, BitMex is stunningly profitable.

Besides, Vijay mentions AbraGlobal as another company that has adopted the vertical business strategy, enabling users all over the world to gain exposure to US stocks by posting BTC as collateral. This opens up US stock market returns to the whole world, build atop Bitcoin as a monetary base.

The market analyst concluded that over the coming years, it would become evident that companies that adopt the vertical strategy and build their businesses on top of Bitcoin would be the strongest.

Jason Lee is a writer for various crypto publications and manages a small team on Medium. His love of technology and inquisitive nature set him up with crypto back in early 2016 and he hasn’t looked back since. In his spare time, Jason enjoys rock climbing and wakeboarding.

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