While the opinion on how cryptocurrency is a bubble that is soon to burst continues to be divided, a cross-section of institutional investors believe in its ability to move past the bad rap and stabilize into mainstream financial operations. Quite a few challenges seem to present themselves as roadblocks on the path to complete crypto adoption.
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Well past the nascent stage, there are a number of tools and tips to equip institutional traders with basic as well as advanced knowledge to trade in the crypto trading space. However, large scale adoption remains a challenge due to multiple reasons that are obstructing the process. In this blog, we will identify the top 5 challenges that institutional investors face while navigating trade in the cryptocurrency industry.
1.Inconsistent and unreliable trading experience because of ill-equipped crypto trading systems
Fragmented data remains to be the biggest challenge that is crippling the cryptocurrency ecosystem. Add to the mix low trading volumes and what we have is the problem of high execution slippage. Since most crypto exchanges were developed as knee-jerk reactions to temporary demands, they were built with poor foresight leading to less scalable systems. Handling large volumes of data, therefore, is almost out of the question, leaving both new and experienced, high-frequency institutional traders high and dry.
In fact, even the largest, most reputable trading exchanges are riddled with issues of high latency when compared to more stable traditional equity trading systems. One of the possible ways to fix this is to build the trading platform on robust architecture that takes care of issues surrounding scalability and stability. Another aspect would be to equip the crypto trading systems with 24/7 customer support that can resolve technical snags and keep the trading experience simple and hassle-free.
2. Lack of user-friendly systems and poor security
Notwithstanding the initial skepticism that continues to cloud the crypto market, there is still the UX problem that crypto enthusiasts are struggling to deal with – that of the lack of usability with crypto interfaces. Aside from that, the intimidation of security protocols for new users creates more barriers to widespread crypto adoption. In traditional markets, order matching and price discovery functions are distinct, and so the order matching and price discovery functions are quite simple. However, in the case of crypto trading, considering that all the functions within the crypto ecosystem are primarily governed and carried out by a single tool, mostly a crypto exchange, there is a crucial dilemma that crypto traders find themselves in. Not only are they exposed to market and liquidity risks arising from their trading activities, but also to counterparty risks associated with the custody and settlement of their assets.
3.Insufficient investor technical understanding and implementation
As an extension of the challenges of inconsistent trading experiences mentioned earlier, owning cryptocurrency mandates a certain level of technical knowledge and understanding on part of the investor, and therefore one has to tread carefully when investing in crypto. One of the primary deterrents to crypto investing is the lack of adequate understanding among potential investors – putting themselves at risk of incurring losses.
4.Lack of regulation
Due to the lack of a regulatory authority to govern the laws of crypto, scams and market manipulation are becoming quite common. In early 2017, a South Korean exchange that operated under the name BitKRK swindled investors and buyers of several millions of dollars before being intercepted by South Korean financial authorities. Also given the fact that crypto is still an unknown territory for a majority of investors – it’s quite a challenge to differentiate between truth and speculation in this area.
5.High volatility and lack of liquidity
The cryptocurrency market is one that is fraught with volatility. As opposed to the traditional stock market, the crypto market is pretty small, which is why there tends to be a high correlation between the price of major cryptocurrencies. This means that even the slightest movement can have a huge effect on the price; considering that wealth distribution in crypto is quite uneven, investors are left with limited options to safeguard the value of their portfolios. Within the Indian context, there is also a risk of trading apps failing when markets experience heavy volatility. For example, when Bitcoin’s price was fluctuating following Elon Musk’s recent tweets, Wazirx failed to load for most users.
Solving the problem of liquidity is quite a challenge as price fluctuations are an effect of the volatile nature of the market. One way to solve the liquidity challenge is to trade on a multi-exchange cryptocurrency trading platform that can most likely help reduce the cost of switching between several exchanges for cryptocurrency traders.
In order for crypto traders to get past these challenges, it is important to build a strong knowledge base around crypto and empower traders with as many tools and techniques as possible, which should be easy-to-use and less intimidating for the average crypto trader, as well as the presence of a globally accessible, low-cost cryptocurrency platform that provides a safe haven for crypto holders and diversification to fiat holders.