Crypto oligopoly: Top-tier exchanges grab 96% market share

CryptoCompare tracker data shows that top-tier crypto exchanges hit an all-time high of 96% market share this year as traders sought lower-risk venues amid broader market volatility.

Crypto exchanges considered top-tier increased their market share to 96% in February from 89% in August, according to data collected by UK analytics company CryptoCompare. These 78 exchanges, led by Coinbase, Gemini, Bitstamp, and Binance, have grabbed market share from peers that have struggled to maintain security and stability.

Top-ranked exchanges traded a total of $1.5 trillion in February. So-called lower-tier exchanges traded roughly $62 billion that month, CryptoCompare said in a report published Monday.

The researcher graded 150 spot exchanges based on everything from legal and regulatory compliance to security to whether they check their customers’ identities and had been compromised in the past.

Consolidation of exchanges has happened through both exchange closure and acquisitions from other, larger exchanges. Top crypto exchanges eyeing overseas expansion sometimes acquire already licensed smaller exchanges operating in the country of interest, as was the case with FTX’s acquisition of the Japanese Liquid Group exchange on February 2, 2022.

The firm reported that since June 2019, 54 exchanges have closed due to being uncompetitive in the market, which has caused further consolidation of users to top-ranking exchanges. Additionally, China’s crackdown on crypto saw six Chinese-based exchanges close.

“As we have seen, volumes have started to become concentrated amongst the top tier exchanges, and this is a trend which is bound to continue into the future. As the industry matures, we expect there to be an oligopoly of exchanges dominating trading volumes as their traction accelerates and smaller players are left behind,” the analysts added in the report.

Lower-ranked exchanges can also have a slew of problems. CryptoCompare’s report details that know-your-customer (KYC) stringency “still requires improvement on many exchanges, with 35% rated as having poor or inadequate KYC programs (vs 34% in Aug 2021).” The report also found that 27% of exchanges sent funds to “higher risk entities for more than 4% of transactions.” And 3% don’t reveal the legal entities associated with them while only 11% offer some form of crypto-insurance, the report said.

CryptoCompare noted some challenges which lay ahead for the cryptocurrency exchange industry, highlighting the political pressure put on exchanges to enforce Russian sanctions as an area that could see more action.

“While many exchanges have resisted this pressure,” the analysts wrote, “this political factor is an important risk to consider for the future of exchanges.”

The movement of crypto users that prefer self-custody of assets was also an issue flagged in the report.

“The mantra of ‘not your keys, not your coins’ is growing stronger amid the political pressure received by exchanges,” the report states, adding that it is a “movement that could hinder the business model of exchanges.”