Op-ed: The Real Story — How Cryptocurrency Exchanges Extract Profit from Everyone
Originally published on: CCN
Read the original article
August 19, 2018
Written By: Alex Mashinsky, CEO of Celsius Network and accomplished VoIP entrepreneur
Most companies or projects that hold an ICO or token generation event (TGE) are under enormous pressure to get their tokens listed on major exchanges as quickly as possible. Most ICOs get listed in less than 3 months. But there are a number of very important reasons why getting listed as soon as possible doesn’t help either the company or the contributors to the project.
That’s why we chose to take a different route. One that is in the best interest of our token holders.
Instead of forking over upwards of $6 million in listing fees (as Binance now commands) just to get CEL on a single major exchange, we decided to avoid that game entirely. Instead, we developed a strategy that allows us to profit as we get listed on multiple exchanges, all without needing to throw away the hard-earned money that contributors entrusted us with in our crowdsale. So let’s take a look at how the exchange game works, and how we decided to do things our own way.
The old game: everyone gets screwed but the exchange
Here’s how the process often plays out.
A project launches an ICO and brings in a decent amount of money. Ideally, that money should be used to build the product or service and add value to the project by allowing the company to hire more developers, fund more marketing, etc.
But instead, what happens so often is the ICO gets immediately put under an incredible amount of pressure from early contributors who got the deepest discounts (or biggest bonuses) to list on a major exchange as soon as possible. These contributors, who only play the short game, don’t care about the project or the crypto community. They’re here to arbitrage their connections and their ability to negotiate discounts as high as 90%, in order to monetize their gains and move on to the next desperate ICO who needs their ETH to help separate themselves from the rest of the ICO noise.
This is because nearly every ICO cannot resist the easy money of flippers and big whales, these are individuals or groups that buy into the ICO with the intent of selling it immediately as soon as it lists in an attempt to snag a quick profit. According to a recent study, the best time to buy and sell ICO assets is during the early stages of a presale, and then within 1-hour of a major exchange listing.
In order to satisfy the early flippers, ICOs need to pay an enormous listing fee to a major exchange. We’ve heard of Binance increasing their listing fee from $2m to a whopping $6 million, due to demand. And even if the project can come up with that astonishing amount, there’s still no guarantee that the exchange will list you. In our case, that means we would have to spend over 10% of our total raise, or over 10 cents of every contributor’s dollar just to list on Binance. It’s hard to justify how this listing could provide that much benefit to the token holders.
Here’s a list from just one of the many companies touting their ability to get companies like ours listed. You’ll see the crazy prices they’re offering.
And that’s just the beginning. Things are about to get a lot worse.
Fake it until you (might) make it
Next, many major exchanges require that you retain the services of specific bots what’s known as market makers.
In simple terms, a market maker is an entity that will make sure that their computer lists at least 10 buy orders and 10 sell orders on the exchange at any time. Some exchanges require 20 orders on each side, or even more. The job of the market maker is to make it appear as though there is significant activity and liquidity on the market on both sides, and to generate the appearance of high volume.
This volume and low spreads gives speculators the artificial comfort that they can get in and out of positions at any time even if there is no real buyers or sellers on the other side. It is estimated that close to 90% of all trades on exchanges are with such bots and not humans. The market maker does not take any financial risk or benefit the token holders, as they merely create liquidity, but do not change the direction of price or net volumes over time.
Market makers are not free, and it’s typically up to the ICO to pay for the services of the market maker. Naturally, those services are not cheap, and not surprisingly, the exchanges will happily put you in touch with, or force you to work with, a specific company which in many cases also represents the exchanges’ best interests.
Not only that, but exchanges often have a third fee. That is, the exchanges will demand a deposit of up to millions of coins or tokens from the ICO in what they call a “liquidity deposit” or charge.
Now, the exchange has the ICO’s coins, a market maker, and an army of speculators. They lay in wait for just the right time to front-run their own clients (the ICOs and users of their platform) and then short the market for said coin using the coins given to them on deposit by the ICO to try and earn obscene profits by watching the project pump and dump all the way down the price charts.
As these exchanges can see the trading volume and movement before you, they always win. If you have perfect timing and people in the know, you can make some money in this game, but most will eventually suffer terrible losses.
I’ve been involved in the financial markets for more than 30 years. I have never seen it this bad, since most stock exchanges are regulated and can not play the games independent crypto exchanges play. Simply put, I fully understands the game that the major crypto exchanges toy with HODLers to their own benefit – and to the detriment of investors.
Binance announced that they plan to earn a profit of $1 billion this year. That money doesn’t just appear out of thin air. Instead, it was collected from ICOs in the form of these sky high fees, trading in front of their client orders and shorting their own listed coins. That billion dollars Binance pocketed for itself (and that includes the distributions they make to their own BNB coin holders) doesn’t benefit the crypto community in the long term.
Paving a new path
So why did we create the Celsius Network and how can we do this better? The good news is that we think we’ve found a better way than simply playing along with the rules the major exchanges force us to use. Since we first came up with the idea for Celsius, we’ve tried to always represent the best interest of the coin holders and to always do what’s in the best interest of our members.
What we’ve decided to do is approach several medium-sized exchanges with wide community support, and develop partnerships with them that we know will benefit all parties involved, including our token holders.
We’re going to offer exchanges the ability to use our services to benefit existing and new customers. We offer crypto holders interest income and dollar loans through the exchanges they already have accounts with, as well as enabling their professional members to borrow coins to short the market – all by integrating exchanges into our system.
The smaller exchanges need unique products to compete with the big boys who have 10x more liquidity and users, to date they could not offer any special products that could attract customers to switch from the top 10-exchanges. Providing the medium-sized exchanges with these new services to their clients is a win-win-win for our members, the exchange users and Celsius.
In return, our exchange partners are happy to list CEL for free and promote Celsius and its services, and they will earn increased profits from taking advantage of what we have to offer through them.
No more games, just genuine value for the community
So what does this mean for the rest of us?
Simply put, Celsius has decided to not waste the money our supporters invested in us on trivial and frivolous expenses like enormous listing fees or paying for market makers to generate fake volume and fees for exchanges.
Instead, we did what we do best – providing real benefits to the community via a unique set of products and financial tools, flexibility and innovation to partner with good exchanges so that we can grow the community as a whole, instead of simply fattening up the largest exchanges.
You may also be wondering why we haven’t completed these partnerships sooner. The answer to that is also fairly straightforward. We believe that Celsius is a real long-term business and that there would be no reason to try and pursue a listing of any kind until we have real products out in the open used by thousands of people, and a real value chain that can benefit from the listing. There would be no point in trying to build up artificial volume or hype when our core business is not yet out of the gate.
We are one of very few projects that can create our own demand for our token, but unlike BNB, which is a house of cards built on fake profits and increasing fake volumes and fees. Our model is based on helping real people and bringing millions of users into the crypto community. As more and more people realize we do represent their best interests and will never act or partner with anyone who does not act in the same way, we will be trusted with more and more coins generating more and more interest income and dollar loans to our members.
All of this activity results in organic and increasing demand for our tokens, as they are the only medium of exchange between the borrowers and the lenders.
But with our first core product, dollar lending on their crypto, already in private beta, we feel much more confident in discussing our listing plans with our community.
So, when exchange? #soon
Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.
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