Bitcoin was introduced onto the markets in 2009. It was designed to allow users to make financial transactions cheaply and securely using blockchain technology, a totally decentralised system. Payments were secured by cryptographic proof.
It wasn’t long before Bitcoin had transitioned from a transactional tool to an investment instrument. More than ten years later, Bitcoin remains the most watched and traded cryptocurrency with Ethereum trading in second place.
Alternative cryptocurrencies quickly followed Bitcoin and in vast quantities. Currently there are more than 2000 altcoins available on the market. Add to this the wide array of exchanges (there were 218 at the end of 2019) and the end result is a highly fragmented environment.
Nonetheless there has been massive growth in market capitalization, and despite the fragmentation, the markets are likely to continue to grow and deliver investors encouraging returns. Traders on platforms like Prime XBT which is present in 150 countries can help to navigate the uncertainties in these markets, thereby reducing the risk.
Two sided markets increase liquidity
In a recent article Josh Li makes a case for development of a two-sided market in the cryptocurrency arena. He argues that this will increase liquidity and reduce fragmentation.
Bitcoin is the most liquid of cryptocurrencies but many of the altcoins are notoriously illiquid. Liquidity can be described by the length of time it takes to sell an asset at the price that the seller would have achieved if he’d had a while to sell. Liquidity is important for investors that want to move in and out of markets quickly. Investors typically gain from liquid markets where spreads are tight.
A two-sided market requires an intermediary or market maker who brings together buyers and sellers. The market maker provides bids and offers. Their objective is to be present to buy when there’s a seller and likewise ready to sell when a buyer makes an appearance. The primary purpose of the market maker is to benefit from the spread, the difference between the bid and ask price.
Two sided markets facilitate trade
Two sided markets offer access to buyers and sellers who may otherwise not have been able to trade. For centuries securities markets have provided traders with access to stocks and shares and this may now be the business model that could gain ground in the world of digital assets.
Participants in two sided markets can both buy and sell. This creates value through reduced transaction costs and simpler, quicker transactions. There are many examples of these types of markets. Credit card companies facilitate transactions between consumers and retailers. Social media platforms also serve this purpose.
Uber offers us a perfect example of a simple and efficient two-sided market. The driver needs customer contact, the customer needs safe, affordable transport and Uber mediates between them. Everyone wins.
Two sided markets offer sellers a way to expand their reach and bring to buyers, goods and services to which they would otherwise have no access. These markets create value streams that would not have existed without them. Many of them are controlled by large corporations who act as gatekeepers and make monopolistic profits.
Two-sided markets tap into the power of the network. The rational user will choose the supplier that can offer the right combination of service quality, delivery speed and cost. The market maker must balance their technologies to achieve these objectives and still factor in a level of seasonality.
Some would argue that cryptocurrency is already a type of two-sided market, as payment can be made in cryptocurrency only if both parties agree. The more suppliers accept the currency the more attractive it becomes to buyers and more buyers use the cryptocurrency the greater the interest by sellers.
The future of cryptocurrency
Over the last five years the cryptocurrency market has grown by more than 60%. There are thousands of cryptocurrencies with many integrated innovations. There are also nearly three hundred exchanges.
As the cryptocurrency market continues to grow, the future will become clearer. Right now, an investment in cryptocurrency is an investment in future financial systems. PrimeXBT can help you to make the best choices for future growth. Perhaps cryptocurrencies will take over from fiat systems. We are almost certainly headed for decentralised markets as demonstrated by the enormous growth in DeFi or decentralised finance over the last few months. One thing is certain cryptocurrency is here to stay.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes