By Lawrence Hecht
Once your token or cryptocurrency has launched, your next goal is to get listed on one or more exchanges. But which exchanges? If your reflexive answer is “as many as possible”, think again. Hugo Benedetti of Boston College has data that indicates cross-listing tokens on multiple exchanges can actually result in lower prices and less liquidity. At the same time, early data shows increased volume and returns for those cross-listed on decentralized exchanges.
The data is based on about 3,000 token and a 100 crypto-exchanges. His most recent paper, co-written with Leonard Kostovetsky most recent was about ICO ROI (return on investment), but this article covers research that has yet to be published. The researchers’ quantitative approach promises new insights that will help traders, regulators, and exchange operators make better decisions. Strategic Coin recently interviewed Hugo Benedetti. He explained that when a token gets listed on an additional exchange, there are key factors that affect both how it will perform. For example, a token in danger of getting de-listed from one exchange due to poor volume will probably not do well just because it gets listed on a second exchange. Token teams that are truly trying to expand into new markets should theoretically expect a better result.
Many pundits have written about a supposed a Binance Effect – a bump in prices due to getting listed on a major exchange – but this generally only has a short-lived impact. More broadly speaking, you would expect a cross-listing to result in price increases because people would say to themselves, “Oh, you got listed in Binance, this is really the great because it means that Finance did a thorough analysis and beliefs that token will generate a large volume in the future.” As Benedetti, explains, a rise in price often happens when a stock gets cross-listed from a low-regulatory emerging market to the New York Stock Exchange. This occurs because of quality signally, but also because of increased access to a larger market and consequently more attention from analysts.
Benedetti is still crunching the data, but it appears that an exchange’s reputation for quality and volume may have less impact than expected in decisions about where to list. With few pricing cues, liquidity becomes an even more important factor in choosing an exchange. Original investors in a token “might want liquidity because they want to sell without having a price impact or they just might want the price to go up.” Yet, he is finding that “cross-listing can actually decrease the liquidity of a token. So, it might be even hurting some.” Even though it is listed on an addition exchange, liquidity may decline because of a market fragmentation. As Benedetti explains:
“Some of these markets are not accessible to the original investors or token holders. For instance, Americans don’t want to invest in Russia, so they wait until it gets listed on an exchange that is accessible to US citizens. But this might not be open to a Russian, citizens, or Chinese or Korean citizens.”
Interestingly, tokens that have “very low volume and have very low price still get cross-listed to other exchanges.” This happens in part because not all exchanges rely on listing and trading fees to make money. Some generate significant revenue by selling data to third-parties. Other exchanges may not be transparent and have a self-trading (i.e., self-dealing) strategy. With revenues coming from multiple sources and the ability to confer a signaling of quality in question, Benedetti believes exchanges “have not been strategic enough on how they should require tokens to list.”
Although they do not see the greatest returns, tokens cross-listing on a see a decentralized exchange see a positive impact on both volume and price. The decentralized exchanges examined have very low or non-existent listing requirements. With little additional information about a token, there should not be a signal of quality due to being cross-listed.
With only a few decentralized exchanges included in the analysis, it may be premature to draw too many conclusions from the data. It is possible the price and volume increases are due to algorithmic trading. Another explanation is that decentralized exchanges have a different universe of participants. Specifically, many people living in the United States, China and elsewhere are barred from trading on more established centralized exchanges. With fewer KYC (know your customer) and AML (anti-money laundering) requirements, the exchanges may be attracting a universe of traders that can’t access other markets. If this is the case, buyers and traders would be focused on a limited number of tokens available on fewer exchanges. Thus, the laws of supply and demand would result in increased prices.
Decentralized exchanges have a long way to go before they can be completely decentralized. An as Benedetti notes, they are really just marketplaces instead of exchanges because they don’t follow any regulation.
We hope to report specific data conclusions from Hugo Benedetti once he finishes writing his next paper. In the meantime, we expect to investigate 1) differences in listing requirements across exchanges and 2) how jurisdiction and regulation affect crypto exchange business models.
- Crypto exchanges are charging up to $1 million per ICO to list tokens: ‘It’s pure capitalism’ – the sensational headline emphasizes the point that exchange business models and pricing continues to be opaque.
- Several companies provide exchange listing services. AssetRush has agreements with many exchanges and consults with customers about the cost of listing with its various partners. Coinist promises at least one list for a fee of 0.50 BTC.
Featured image via Flickr