CEO Reveals the Unethical Ways Exchanges Make Money – And How He Beat Them at Their Own Game
We’ve heard stories about exchanges charging enormous listing fees for new tokens. Now, thanks to an op-ed piece posted by CCN.com, we have further insight into how cryptocurrency exchanges make money – including how they wring money from ICOs and investors.
The post was written by Alex Mashinsky, CEO of Celsius Network. In his post, Mashinsky explained the process he went through to get his company’s CEL token listed on different exchanges – including the strategies he used to fight back against exchanges and their predatory tactics.
“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.”
Mashinsky goes on to explain “how the exchange game works” and how the company decided to do things in its own way.
How It Usually Works When Listing Tokens on an Exchange
Typically, exchanges make a lot of money from listing a token on their exchange. As mentioned above, Binance charges over $6 million to list a token.
ICOs are often flush with cash. They’ve just raised millions of dollars. It’s easy for them to justify paying this fee and adding the token to the exchange. However, this money is undoubtedly better put towards hiring developers, marketing the project, and other purposes.
If an ICO was smart, it would avoid paying the listing fee and put the money towards long-term development of the project.
Unfortunately, this is where many ICOs – even the ones formed with good intentions – run into problems. Here’s how Mashinsky explained it:
“…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.”
ICOs struggle to resist the easy money of flippers and big whales. Let’s say you have a million coins as part of your “developer’s share” after an ICO. Those million coins are worth a penny apiece today. In 10 years, if the project is successful, the coins could be worth $100 apiece. If you pay money today to list your coin on a major exchange like Binance, however, your coins could be worth $10 next month. This easy money is hard for anyone to resist.
In other words, paying the listing fee gives little benefit to users or those who are genuinely interested in the project, but it provides enormous benefit to the whales and any developers looking to make a quick buck.
Exchanges Require You to Use Market Maker Bots
Another thing that not many people know about exchanges is that many of them require you to use market maker bots. Here’s how Mashinsky explains it:
“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.”
When speculators and investors see high volume and low spreads, it encourages them to make a trade. Investors are more likely to participate in a liquid market than an illiquid market.
Nevertheless, this creates an artificial trading environment. Some reports suggest that nearly 90% of all trades on exchanges are performed by bots – not humans.
Market maker bots aren’t free. You need to employ the services of a market maker. In many cases, the exchanges push ICOs into using a specific market maker – often one with high costs.
Exchanges Require a Liquidity Deposit
In addition to the listing fee and the market maker requirement, exchanges require a third fee: most exchanges require ICOs to deposit up to millions of coins in order to create a “liquidity deposit”.
This is where exchanges get particularly malicious:
“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.”
The reason exchanges are so successful at this game is because they can see the trading volume and price movements before ordinary users. They always win this game. Even someone with perfect timing and inside sources doesn’t have the same ability to track markets as an exchange.
Binance, meanwhile, just announced that it expects to earn a profit of $1 billion this year. Much of this profit is derived from ICOs and the exchange’s own trading activities.
How Mashinsky Avoided this Game, Saved Money, and Listed His Token
Mashinsky’s blog post has two parts: the first part discusses the predatory tactics used by cryptocurrency exchanges. The second part discusses how Mashinsky was able to beat exchanges at their own game with his company’s Celsius Network token (CEL).
To start, Mashinsky has approached several medium-sized exchanges with wide community support. Celsius Network is developing partnerships with these exchanges. These partnerships will ensure that everyone will benefit from the exchange listing – not just the exchange.
How will exchanges benefit from a new token listing if Celsius Network isn’t planning to pay an exorbitant fee? This is where Celsius Network got creative:
“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.”
In other words, Celsius Network allows exchanges to use the company’s services in exchange for a token listing.
It’s a win-win situation. Medium-sized exchanges get the tools they need to compete with larger exchanges, while Celsius Network gets the token listing it needs to continue growing – all without paying a $6 million listing fee to a giant like Binance.
Mashinsky and the team at Celsius Network have created a way to beat exchanges at their own game.
The end result is the creation of genuine value for the community. Under this model, the entire crypto community benefits – not just major exchanges like Binance.