Someday soon, crypto-enthusiasts think big financial firms will buy and sell bitcoin like any other asset: stocks, bonds, gold, whatever. But trading on this scale involves volumes and scrutiny that the most popular cryptoasset exchanges today may not be prepared to handle. Although they got in on the action early, these exchanges face costly technology upgrades or ugly meltdowns as activity increases and major exchange operators muscle in on the market.
The homegrown technology used by many cryptocurrency exchanges is coming under strain, and not for the first time. The major platform in bitcoin’s early days, Mt. Gox, was originally designed for trading “Magic: The Gathering” cards. It led the way until hackers stole from its customers, helping drive the exchange into bankruptcy.
Now, some bitcoin platforms are reaching their limits amid the cryptocurrency euphoria, according to an industry expert who has examined the venues. While declining to single out a particular exchange, the person said the venues generally haven’t been stress tested. Although systems upgrades are underway, best practices in the field are far from standardized.
Institutional investors would “welcome overall a more sophisticated exchange presence,” Bank of America Merrill Lynch analysts wrote last month. Although there are many trading platforms, “by and large these do not offer the same quality of technology as the large global exchange groups.”
Conversations between cryptoasset platforms and sellers of matching engines designed for the exchange industry have taken place, but a technology executive says that bitcoin startups couldn’t stomach the price tags. The systems can cost anywhere from $500,000 to $10 million a year, depending on the size of an exchange. Top-tier systems are equipped with things like surveillance detection for market manipulation and specialized order types. Battle-tested exchange systems like these are for sale from companies like Nasdaq and a unit of London Stock Exchange Group.
CME Group and Cboe Holdings—the big Chicago exchange operators planning to launch bitcoin futures—developed their own trading platforms over their long histories. And while established exchanges are not immune to technology meltdowns, they’re familiar to regulators and have been tested in market panics. They’ve spent time tuning circuit breakers and tweaking collateral requirements to manage big price swings, based on experience.
“It’s not the size of trades that causes problems for an exchange—it’s usually the volume,” said Mark Hemsley, president of Cboe Europe.
Read full article: https://qz.com/1120991/bitcoin-exchanges-may-not-be-ready-for-the-big-time/
