The world is coming to trust cryptocurrencies in a significant, but uneven way, according to recently released research.
This is more than the victory of slick marketing operations and social media influencers, however. It represents the work of an important ecosystem of watchdogs and analysts in the crypto space and the industries surrounding it that are helping individuals and institutions separate the wheat from the chaff.
In a recent international survey by Bitstamp, one of the first major digital asset exchanges, 70% of more than 5,502 institutional investors said they were very likely to recommend cryptocurrencies, and 71% reported having a “high trust” in crypto as an investment.
“My perspective is that, in general, the media in this country portrays the trust for crypto as low, just based on everything I read and see,” Bitstamp CEO for the Americas Bobby Zagotta said. “This survey validates for me that the media are going after headlines more than accuracy when it comes to the crypto space, because the trust for crypto is actually amazingly high — in the upper 60s for retail and into the 70s for institutions.”
Trust in crypto still lags traditional asset classes like real estate, with 82% of respondents indicating high trust, and stocks (80%), but high levels of trust in general suggest crypto has entered the mainstream.
The survey, which also included over 23,000 retail investors, found that the adoption of crypto is set to increase.
Crypto Exchange Vetting
In an era of cryptocurrency Super Bowl ads, it may be surprising that one of the bigger drivers of crypto adoption is operating mostly behind the scenes. Companies like Digital Asset Research (DAR) are vetting and rating crypto exchanges and adoption to clear the way for institutional investors to participate in the asset class.
“We realized that pricing data is a huge challenge. To get clean pricing data that’s reliable and good you can go to a single stock exchange and get the definitive price of a stock like Apple and know that it is the market price,” DAR CEO Doug Schwenk said. “In crypto you can’t do that. Exchanges pop up all the time, and who knows if they are reliable and good venues to do business in? In most cases they’re unlikely to be regulated at all.”
DAR recently released the results of its April 2022 Crypto Exchange Vetting, which analyzed 450 exchanges to certify just 21 exchanges as “vetted.”
The exchange vetting process combines quantitative and qualitative due diligence to find exchanges reporting accurate volumes and eliminate exchanges that are not appropriate for determining an accurate market price.
The recently implemented quantitative screening looks for suspicious trading patterns by sampling sets of consecutive trades and testing them for randomness – the process identifies exchanges that are inflating trading volumes.
Qualitative due diligence includes researching information about an exchange’s trade surveillance, enforcement, know-your-client and anti-money-laundering policies, business continuity plan and management team, Schwenk said.
“We end up with a list of what we’ll call the most reliable venues in the space today,” he said.
Vetted exchanges on DAR’s report include Binance.US; bitbank; Bitfinex; bitFlyer; BITFRONT; Bitso; Bitstamp; Bittrex; CEX.IO; Coinbase Pro; Coincheck; CoinField; CrossTower, FTX.US, Gemini; itBit; Kraken; Liquid; LMAX Digital; Okcoin; and Zaif.
Is 21 ‘Vetted’ Firms a Lot?
So out of 450-plus crypto exchanges, only 21 were good enough to be “vetted?” That’s less than 5%!
“It says a couple of things: One is that there are incredibly low barriers to entry, almost anyone can set up an exchange, and also that the reported volumes in the crypto space are wildly overinflated,” Schwenk said. “That’s not just us, you can look at the Bitwise report put out about two years ago that said 95% of the activity in bitcoin is either fake or non-economic. Clearly, you have to be careful out there in the transacting space.”
DAR also keeps a watchlist of firms who are candidates to achieve vetted status, with 14 members: Binance; Bitkub; BKEX; BTCMarkets; CoinEx; CoinTiger; Dcoin; FTX; Gate.io; Huobi; KuCoin; LATOKEN; Phemex; and Poloniex.
Bitcoin.com recently fell off the watchlist.
“A lot of these venues were started by people who are not from financial industry backgrounds and who really didn’t know what to do to ensure compliance and quality,” Schwenk said. “Given the right feedback, a lot of them have pursued stronger operations, real compliance procedures, and started doing the things we’re asking for. We’re also trying to help the space mature.”
The vetting process informs indexes, both DAR’s own and those of third parties, particularly FTSE’s crypto industry indexes, as well as the FTSE DAR Reference Price, a “robust” hourly reference price for digital asset market performance.
DAR also vets digital assets – its last digital asset evaluation was completed in March and analyzed over 1,000 different digital assets across codebase construction and maintenance, community, security, liquidity and regulatory compliance factors.
“One thing we’ve seen over the past three to nine months is that these kinds of data quality and concerns about how do you know you have a price that is reliable have become increasingly more important as we’ve seen more regulation in this space,” said Schwenk. “Market participants are getting in who were not in the space historically. We think we’ve seen in the past six months some maturity happening in crypto that is a new wave, it’s an exciting time for us.”
Stiil, Bitstamp’s survey finds that trust in developed countries like the U.S. lags the levels of trust for crypto found in developing countries.
“There’s less trust for the typical central bank and other institutions in the developing world, so they got to crypto first,” Zagotta said. “Our survey also showed that the more knowledgeable someone is about crypto, the greater their trust. That means that as people in the developed world learn more, their trust in crypto is going to increase, and so will their adoption.
“We can’t think just in terms of the next one million customers on our platform, we need to think about the next 10 million. That trust index is a leading indicator of continued strong adoption.”