Chainalysis Report: Analysis of the Competitive Landscape of Cryptocurrency Exchanges in 2021

Author: Chainalysis

Compiled by: Rachel

In recent years, the adoption and price of cryptocurrencies have steadily increased, allowing this asset class to attract institutional investors and continue gaining momentum. Against this backdrop, the businesses that make up the cryptocurrency industry have also experienced a period of sustained growth. Take a look at the chart below, which shows the monthly value of cryptocurrencies received by exchanges since 2019.

Monthly Cryptocurrency Value Received by All Exchanges

While the monthly growth is not constant, the value flowing into exchanges generally shows an upward trend. However, over the past year, competition among cryptocurrency exchanges has become very intense, and it now seems to be consolidating. We can see this in the chart below, which shows the number of active exchanges per month from January 2019 to now.

Number of Monthly Active Cryptocurrency Exchanges

The number of active exchanges plateaued around July 2020 and then began to decline. As of August 2021, the index stood at 672, having peaked at 845 in August 2020. Why is the number of active cryptocurrency exchanges declining? What distinguishes the most successful ones? In this report, we attempt to answer these questions by observing the differences in growth trends among exchanges across multiple variables.

Exchanges Segmented by Business Model

We categorized exchanges into six different categories based on their business models and technological infrastructure to investigate which types of exchanges are thriving as industry competition intensifies. These categories include:

• Centralized Exchanges (CEX)
• Decentralized Exchanges (DEX)
• High-Risk Exchanges (exchanges with the lowest KYC requirements)
• OTC Brokers
• Derivatives Exchanges

Using these categories, let's examine which types of exchanges have increased or decreased in number since early 2019.

Growth of Active Exchanges by Business Model

Data shows that the number of active DEX and OTC brokers has significantly surged since 2019, with derivatives exchanges also experiencing slight growth. Meanwhile, the number of CEX and high-risk exchanges has slightly declined after an initial increase.

In addition, we further segmented these categories by size, describing all exchanges as either small or large, with small exchanges defined as those that received a total cryptocurrency value of less than $10 million between August 2020 and August 2021. Furthermore, we can refine the centralized exchange category into more specific types: C2C (crypto-to-crypto) trading allows only trades between different types of cryptocurrencies; C2F (crypto-to-fiat) trading allows users to exchange fiat currency for cryptocurrencies, making it a preferred service for cryptocurrency users.

Growth of Exchanges by Business Model and Size

Note: Our analysis includes only four derivatives exchanges, all of which qualify as large exchanges, making this the only size distinction in this category.

By combining the size of each type of exchange, we can gain a more detailed understanding of which types of cryptocurrency businesses are thriving. Large decentralized exchanges, large high-risk exchanges, and large exchanges in other categories—primarily those nominally classified as C2F but perceived by users as C2C—have experienced the fastest growth so far, with the number of these exchanges tripling. Several other categories also show moderate but substantial growth, including large OTC, large C2F exchanges, and derivatives exchanges. On the other hand, most small exchanges across various business models, including C2F and C2C exchanges, have seen a decline in number.

Of course, the number of active exchanges in each category is not the only way to assess the health of these categories. After all, cryptocurrency businesses are not just about survival; they need to expand their user base and trading volume to thrive. Below, we look at the same categories by the growth rate of value received.

Value Growth by Market Segmentation

There is a clear divergence between service types that have seen significant growth and those that have contracted or remained flat. Interestingly, during the period from May to June, most services experienced a notable decline in received value. While we cannot pinpoint the exact reason, we believe it may be related to China's ban on cryptocurrency mining.

Next, we summarize the results of the above charts by showing the total growth in trading volume for each exchange category from August 2020 to August 2021.

Value Growth Received from August 2020 to August 2021 (by Market Segmentation)

These results confirm some of our previous conclusions. During the study period, large DEX saw a significant increase in trading volume, as did large OTC brokers and large CEX. However, despite the number of active businesses not growing significantly, derivatives exchanges experienced the largest value growth, reaching 686%. On the other hand, the amount of cryptocurrency received by almost all categories of small exchanges decreased, regardless of their business model.

The biggest takeaway here is that DEX has become very popular, coinciding with the explosive growth of the DeFi category overall.

Total Value Received by DEX Monthly

The total value received by DEX grew from just over $10 billion in July 2020 to a peak of $368 billion in May 2021, and as of September 2021, it was just below $143 billion. While trading volume for centralized services is also increasing, the growth rates vary, and in some months, DeFi activity has surpassed that of centralized services.

In our 2021 Cryptocurrency Geography Report, we discussed the differences between DeFi users and cryptocurrency users. Our research indicates that DeFi trades tend to be larger than cryptocurrency trades on centralized services. Below, we will compare the trading sizes of DEX transactions with those of several other types of exchanges using data from August 2021.

We found that DEX users execute much larger trades than CEX users, with the average cryptocurrency value of a DEX trade exceeding $26,000, while that of a CEX trade exceeds $12,000. The median DEX trade is slightly above $900, while that of CEX is $150. This may be because DeFi is more popular in countries with larger, more mature cryptocurrency markets, which are often wealthier. David Gogel, head of growth at dydx, explained this dynamic: "Most DeFi users are seasoned cryptocurrency investors or traders looking for new sources of alpha." Given this, it makes sense that their average trade sizes would be larger, as DEX users may have established a substantial capital base to deploy or are investing on behalf of others. The above image shows that derivatives exchanges may also exhibit a similar dynamic, with their average and median trade sizes significantly larger than standard CEX.

In-Depth Look at Exchange Size and Offered Assets

As the data above indicates, large cryptocurrency businesses are growing and surviving at a faster rate than small cryptocurrency businesses. Among all exchange categories, large exchanges are the only group that has grown from 2019 to the present, with the exception of small P2P platforms, which saw a mere 9% increase in received value. There could be many reasons for this; perhaps new users are more likely to have heard of larger exchanges, leading them to flock to those when deciding to purchase their first cryptocurrency; or perhaps the superior liquidity of larger exchanges allows them to attract the biggest traders.

Our analysis indicates that the number of unique cryptocurrency assets available plays a significant role in the survival rate of exchanges during the studied period. The chart below compares the trading value received by exchanges with the number of unique assets available.

Average Monthly Value Received vs. Number of Assets Offered by Exchange Segmentation

The data clearly shows that while many exchanges with fewer available assets have higher trading volumes, the more assets available, the larger the trading volume tends to be. Below, we break down the trading volume by asset for each exchange category and size.

Total Value Received by Exchange Sector and Asset Class in 2021 to Date

Overall, the fastest-growing exchange categories tend to allocate most of their trading volume to Bitcoin or Ethereum, which is relatively unsurprising given that Bitcoin and Ethereum are the two most popular investment cryptocurrencies.

However, we see some notable exceptions. For instance, based on the value received during the studied period, derivatives exchanges are the fastest-growing exchange category, with stablecoins being their largest asset by trading volume. Large exchanges in the "other" category and large C2C exchanges also rank third and sixth in growth rates, respectively. This may be because derivatives and C2C exchanges, along with many exchanges in the "other" category, cater to experienced traders and do not allow conversions to fiat currency on their platforms. As a result, when traders no longer wish to trade or continue to be exposed to cryptocurrency price fluctuations, they rely on stablecoins to lock in asset value.

Most notably, in many cases, the fastest-growing exchange categories tend not to derive all their trading volume from any one asset, nor do they derive very little from any one asset. While Bitcoin or Ethereum are often the most popular, the fastest-growing exchange categories typically still have substantial trading volume across the other two asset types, indicating that the best exchanges can cater to a variety of use cases or meet the needs of users requiring multiple asset types.

Innovation and Scale Win in the Competitive Landscape

Our analysis of the competitive landscape of cryptocurrency exchanges indicates that innovation and scale—ideally both—are key to achieving differentiation and growth in an industry that has recently become consolidating. DEX represents innovation in cryptocurrency trading; just last year, the activity of these decentralized, non-custodial platforms paled in comparison to CEX, but since then, DEX has caught up and surpassed centralized services in trading volume within months, allowing users better control over their assets and enabling new types of trading.

On the other hand, the continuing growth of CEX appears to be driven by those exchanges that offer the widest variety of assets, making them attractive to the most active traders. However, C2F exchanges may be an exception to this trend, as they serve as the entry and exit points between cryptocurrencies and fiat currencies, meaning they will always be the preferred platform for new and experienced users looking to convert cryptocurrencies to cash.