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Fundament of the week: Cryptocurrency delisting

Just as some of the shares in traditional financial markets are occasionally withdrawn from the stock exchange for various reasons, are cryptocurrencies withdrawn in a similar way. Today, we will look at some of those scenarios.

The reasons, which contribute to traditional delisting, include, for example, bankruptcy, project termination, mergers and acquisitions (M&A), and non-compliance with listing requirements. Although the factors supporting the removal of cryptocurrencies are conceptually different from the factors supporting the removal of shares, several similarities can be found.

What is cryptocurrency delisting?

Delisting refers to the removal of a cryptocurrency (coin or token) or trading pair (eg LTC / XMR) from trading. Deletion can also take place voluntarily for various reasons at the request of a cryptocurrency project lead. Alternatively, a more common reason for (involuntary) exclusion is that the cryptocurrency no longer meets the various listing requirements set by the exchange.

Criteria for delisting

There are several factors that can lead to the cryptocurrency delisting

Regulatory uncertainty

In pursuit of the long-term functioning of the cryptocurrency exchange, especially those based in the United States, crypto exchanges take on the responsibility of self-regulation by ensuring that their activities are strictly governed by general guidelines or by any legal form indicated by regulators. For example, the US Securities and Exchange Commission (SEC) has published a set of guidelines that define cryptocurrencies. It clarified the definition of cryptocurrencies by taking over the capacity of a security, currency, or commodity. For this reason, cryptocurrency exchanges established and licensed in the United States are required to comply internally with these guidelines by ensuring that no cryptocurrency security is listed on their platform. This allegedly prevents the regulatory measures in the securities field from taking place. SEC guidelines are not legally binding or enforceable. However, we know from experience that security cryptocurrencies, such as Monero and Zcash, are also traded on these exchanges.

Low volume and liquidity

The main activity of the cryptocurrency exchange is the acquisition of trading and other fees, such as those for withdrawal. Whenever a user buys or sells a cryptocurrency on the crypto exchange, a fee is charged. In the daily execution of millions of trades, there is a strong incentive for stock exchanges to support high-volume cryptocurrencies. A cryptocurrency with a high trading volume is a cryptocurrency with a high level of liquidity, this means that it is a very sought-after coin when it comes to traders. Cryptocurrencies with declining volumes and low liquidity are losing attractiveness among users, slowly paving their way towards exclusion from trading. Supporting cryptocurrency on the crypto exchange requires economic resources that the exchange must use, and if the coin has low liquidity, it makes no sense for the exchange to continue to support it.

Failure to comply with dimensioning requirements

Placing any cryptocurrency on the market means a set of requirements that a project must meet. Failure to comply with these requirements may result in the cessation of the cryptocurrency. The main factors in deciding on delisting from the stock exchange include:

  • General team commitment of the project
  • Activity, quality, and level of development
  • Network stability and security
  • Degree of external communication of the team
  • Response to a request for due diligence in trading
  • Fraud or unethical activity
  • There are many other factors in the crypto exchanges themselves. Given that trade in cryptocurrencies is geared towards compliance with legislation, active and effective enforcement of their criteria is an indispensable part of ensuring the long-term viability of their business. Trading cryptocurrencies that are in conflict with the requirements and principles of the exchange could pose a legal risk.

    Security breach

    Security is the highest aspect of any project, given the digital nature of operations. Especially in this budding phase of blockchain technology. Not surprisingly, major technical and security weaknesses lead to the delisting of cryptocurrency.

    As soon as internal cryptocurrency developers discover a security vulnerability or technical ambiguity in the cryptocurrency network (e.g., 51% attack), measures must be taken to protect the cryptocurrency holders. This requires a constant exchange of information between project team members, and if developers' reactions are insufficient, delisting is likely. This happened, for example, when Bittrex stopped offering BTG after a 51% attack on its network.

    Consequences of delisting

    Any removal of the cryptocurrency from trading could have devastating consequences:

    Depreciation of prices

    The most visible effect is a sharp drop in prices at the time of notification. Normally, the first announcement will be made to eliminate several cryptocurrencies that are currently actively traded on the crypto exchange. The exchange will give coin holders two to three weeks to prepare for delisting. Thereafter, the cryptocurrency is permanently removed from the exchange without further support from its side.

    Reduced liquidity and trading volume

    The liquidity of a coin depends on its traded volume. Low liquidity coins have low trading activity and few buy and sell orders. The liquidity of a cryptocurrency can also be affected by the number of exchanges that have it on offer. If a cryptocurrency is traded on several crypto exchanges, the volume of trading is greater and its liquidity also increases.

    Loss of credibility

    The main consequence of delisting is the general loss of public credibility with the whole project. In general, it is likely that cryptocurrencies will be delisted from trading as soon as serious and fundamental shortcomings or adverse project changes occur which could then lead to long-term sustainability issues.

    Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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