Concentration Risk in Crypto Markets: Structural Vulnerabilities of Centralized Exchanges

Source: CryptoNewsNet Original Title: Analysis Company Reveals “The Danger Surrounding the Cryptocurrency World” Original Link: https://cryptonews.net/news/market/32132193/ The increasing concentration of liquidity in a smaller number of centralized exchanges in the cryptocurrency markets has brought serious risks back to the forefront across the sector.

According to a new report published by cryptocurrency data and research company Kaiko, excessive reliance on certain major exchanges, in particular, poses “significant structural, operational and legal risks” for the market.

Kaiko noted that a “clear concentration risk” has emerged in the crypto markets, pointing out that the accumulation of a large portion of liquidity in a few centralized exchanges could lead to larger, on-chain losses during periods of volatility. The report stated that despite the central role of major exchanges in the sector as the world’s largest crypto exchanges by trading volume, this situation exacerbates the risks.

The report noted that certain major exchanges are not formally regulated institutions, have faced regulatory challenges in the US for failing to adequately combat money laundering, and do not hold a MiCA license in Europe. According to Kaiko, this situation creates serious operational and legal vulnerabilities for the crypto ecosystem.

Following the sharp market crash in October, which wiped out approximately $19 billion in open positions, the dominance of centralized exchanges in the market has once again become a subject of debate. During that crash, it was reported that some tokens on major exchanges experienced price deviations, and some investors faced problems accessing their accounts. Major exchanges subsequently announced plans to pay hundreds of millions of dollars in compensation to investors.

It is pointed out that past problems experienced by centralized exchanges have led to major market fluctuations. The bankruptcy of FTX in November 2022 triggered sharp declines in Bitcoin and many major crypto assets, dragging down numerous crypto companies as well.

According to current data, major exchanges’ daily trading volume in spot markets exceeds $15.3 billion. In the derivatives market, they are among the most dominant players with approximately $27 billion in open positions. Analysts warn that any operational, legal, or technical shock to major exchanges could lead to significant price disruptions across the market.