What is crypto delisting and the economics behind it? When an asset is removed from an exchange it is called delisting. Well, if you want to know more about delisting then you will need to know much more than that.
You will need to know why assets are delisted and the economics behind it as well.
This may need a lot of research from your end, or, alternatively, you can go through articles like this that will tell everything about delisting of crypto from an exchange.
This article will also tell about the economics as well as the underlying factors of it.
Delisting of an asset usually happens after a request for it is made by the project team.
It may also happen when the listed product does not uphold the listing requirements of the exchange any longer.
However, there are lots of other different factors that may go into the decision for a crypto exchange to delist a particular asset. Some of these influencing factors are:
- Quality of deployment
- Level of activity
- Commitment of the team towards the project
- Project network security and stability
- Stability of smart contract
- Level of communication between the project team and the public
- Evidence of fraudulent events or unethical behavior
- Responsiveness from the exchange to due diligence and
- The contribution of the project towards a sustainable and healthy crypto and blockchain ecosystem.
Also, the exchange may delist an asset if it feels that it is risky to conduct business with the asset or it is risky to continue doing business with it.
All these need a discussion at length for a better understanding.
What is Crypto Delisting and the Economics Behind It?
Crypto delisting is a common phenomenon of the market and it has been done since a long time by the crypto exchanges.
As you may know, there are thousands of different types of crypto coins available in the market and are listed on a crypto exchange.
Given this fact, it is needless to say that there will be a few of them that will fall through the cracks when the value and popularity of them reduces.
These coins are therefore delisted just as it is done for the traditional stocks in a traditional equities market for non-compliance.
However, in the case of a crypto coin there may be several other reasons for delisting such as:
- Mergers and acquisitions
- Discontinuation and more.
Therefore, the factors that underpin the delisting of crypto coins are quite different from those related to stocks but there are a few nuanced resemblances.
Ideally, when a crypto coin is delisted from an exchange, all of the trading pairs related to it are also removed and the trading activities will cease.
However, at this point withdrawing the asset will be allowed till a specific period of time and the clock starts from the time it is delisted from the exchange.
However, you can still trade the asset on other crypto exchanges, especially those decentralized exchanges that have not delisted the particular crypto coin yet. You may also trade these assets through Over the Counter Trading.
Reasons of Delisting
Several crypto exchanges delist crypto coins periodically both voluntarily and involuntarily.
This act of delisting is typically done to sieve out the different offerings made by the crypto exchange.
Apart from the reasons mentioned above, there are also a few good reasons with respect to the market conditions that may call for delisting a crypto coin from an exchange.
However, each crypto exchange may have an entirely different delisting and listing policy of its own.
For example, a few exchanges may need an upfront fee while listing crypto coins.
Delisting is a very common phenomenon that happens in a bear market.
This is pretty much the opposite of a bull market where it is very common to add crypto coins to the list of the exchanges.
One of the most significant effects of the bear market is the drying up of the necessary capital to run a crypto project.
As you may know every crypto project needs steady development as well as proper marketing irrespective of how great a product it is.
Therefore, without capital a project is sure to fail.
Moreover, if a particular crypto coin does not have a powerful community of volunteers behind it then developing the code can be really difficult.
It will have to pay the price for it and such payments to the blockchain developers are certainly not cheap.
This may not be much of a worry for any crypto project when the price of it is rising but when it is falling or is constant, there may be a lot of issues arising with relation to it. In such situations, these coins need to be delisted.
These issues can further escalate if there is no money to sustain and for marketing or there is any consistent development.
In such situations the communication between the crypto community and the team behind the project can disintegrate.
This also means that the GitHub will not be updated and the people will not be able to find any positive news regarding the specific crypto coin.
This will result in a vicious circle which will lower the value of the coin as well as depress all those who are involved with the project.
All these factors will lower the daily trading volume of the crypto coin which is typically influenced by the speculative traders.
Sometimes the crypto exchanges follow a much liberal listing policy.
This is why you will see that projects that are clearly a Ponzi scheme as well as those pyramid-type schemes get listed and still exist on different crypto exchanges.
This is another significant factor that causes delisting of a crypto coin though such liberal listing policies may not be bad for some exchanges.
However, this can be extremely detrimental for those crypto investors who are unwise and inexperienced because they are typically unaware of the litigious ideas behind the pyramid schemes.
Apart from a bear market, crypto coins can also be susceptible to weak hash rates that can result in 51% attack.
In case there is a 51% attack and the blockchain is modified then it may kill the cryptocurrency theoretically.
This will once again need that coin to be delisted from the exchange.
The pump and dump practices with the illiquid coins by the crypto whales may manipulate the price of the coin benefiting them at the expense of the average crypto investors.
If this thing happens consistently then it is highly possible that the crypto exchange will not like to have that particular coin in its list since it will fail to adhere to the regulations.
The regulatory landscape throughout the world has left some gray areas in the crypto space.
It is for this uncertainty that most of the crypto exchanges delist crypto coins and tokens before these are declared as security tokens by the Securities and Exchange Commission.
The SEC has published a set of rules in the US to define cryptocurrencies clearly to distinguish them from currency, security, and a commodity.
The crypto exchanges in the US have assumed the responsibility of self-regulation to make sure that they stick to these guidelines and do not list any security tokens in order to avoid securities regulatory scrutiny.
The primary income of the crypto exchanges is through the trading fees and a series of other fees that they charge from anyone who buys or sells crypto coins on the exchange.
With a large number of trades made daily these fees are strong incentives for these exchanges to support those coins that have a high trading volume and continue to support them since it equates to high liquidity as well.
Any other coin that is low on liquidity and volume will be delisted because it proves that it has lost its appeal among the users.
Since supporting a coin by an exchange needs economic resources, there is no sense in supporting any coin that has a low liquidity.
Delisting these types of coins will free up the spots where precious coins or resources can be allocated to maintain and survive.
Also, when failure to adhere with the requirements of the exchange hampers the reputation of it and may even result in a legal consequence for a specific crypto coin, that coin may be delisted from the exchange.
Implications and Effects
When a crypto coin is delisted from an exchange it has several different implications.
It will affect the price of the crypto coin because it will be unpopular and traded less frequently.
Typically, if a coin is in the major exchange and is delisted, then the reduction in price can be anywhere from 20% to 50%.
Also, if a particular coin is not supported by too many crypto exchanges the liquidity of the coin will decrease as well.
It will not have too many buy or sell orders.
Apart from the above, there can also be some more devastating effects of delisting a crypto coin from a crypto exchange such as loss of credibility and faith of the public.
It will signify its basic weaknesses and its inability to sustain for a long time due to unfavorable changes to the project.
Loss in public perception towards a crypto coin may hinder the success of it in a great way because it is the people who can make or break a trade, and the reputation of the coin as well as the overall vision of crypto exchange along with it.
Typically, the crypto exchanges follow a specific process both for listing and delisting a coin. To have a better understanding, you should know of them both.
Ideally, the coin listing process by a crypto exchange is not necessarily the same as the process followed while listing stocks on a public share market. However, it is pretty close.
In a stock market, every stock needs to go through an IPO or Initial Public Offering. This is a very tedious process.
According to the rules, every company that wants to list its stock on the public market must disclose a huge amount of information.
This includes and is not limited to financial information, intended vision, plans and business model.
This process takes a long time to complete, often months and even years and also costs the company hundreds of thousands of dollars in the form of legal, accounting, and marketing fees.
And, the company also needs to hire an underwriter to advocate for them while getting listed on different exchanges.
Though close, the current crypto listing processes followed by the exchanges has no specific standard as the IPOs just like several other things on the public blockchain setting.
The process may vary from one crypto exchange to another while determining things individually.
Usually, the crypto exchanges used to charge exorbitant fees for listing coins and this resulted in significant community discontent.
However, there are several crypto exchanges that now have made their listing policies and prices public.
A few have even done away with such prices altogether.
However, most of the crypto exchanges now have integrated more benchmarks that are community oriented in their coin listing rules.
This is unique for crypto coin listing in comparison to IPOs.
In this process the exchanges compare the coin listing applications that have high level values as one of its most significant criteria for coin listing.
On the other hand, the current coin delisting process is unfortunately not made public by most of the crypto exchanges.
While in the traditional stock markets an exchange may generally delist a stock when there is a significant fall in the trading volume with respect to a specific price and a sustained period of time, it is more than that in the case of crypto coin delisting.
As said earlier, the crypto exchanges also consider any particular antisocial behavior regarding the coin and any adverse comment on the social media on the specific crypto coin apart from a low trading volume.
Now that the reasons and economics behind delisting a crypto coin from an exchange are known, you will not be amazed when you find some more coins delisted next month and reassess your investment so that you do not lose in the end.