Another day, another problem for centralized cryptocurrency exchanges. After the Securities and Exchange Commission went after Kraken for offering unregistered crypto staking products, it now appears to be going after Binance (BNB 4.72%). And don't forget about Coinbase (COIN -3.17%) -- it, too, has been under regulatory pressure for actions such as listing coins that haven't yet passed regulatory muster.
Given all this regulatory risk for centralized exchanges, the fortunes of decentralized exchanges are on the rise. As the biggest decentralized exchange in the world right now, Uniswap (UNI 2.84%) is an obvious first choice for investors trying to make sense of a constantly shifting crypto landscape. Right now, Uniswap is the only cryptocurrency exchange I'd buy, and here's why.
Decentralized exchanges vs. centralized exchanges
There are several key differences between centralized cryptocurrency exchanges and decentralized cryptocurrency exchanges. First and most importantly, with decentralized exchanges, there are no headquarters, no executives, and no intermediaries for each trade. All trading is essentially peer-to-peer. With FTX (FTT -2.40%), by contrast, there were headquarters in the Bahamas and a group of insiders led by former Chief Executive Officer Sam Bankman-Fried.
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Moreover, decentralized exchanges such as Uniswap do not require investors to hold their crypto funds directly on the exchange. Instead, investors hold their funds in a private crypto wallet that they control. This significantly mitigates the risk of an FTX-style meltdown, since investors don't have to worry about their funds being frozen on the exchange.
Finally, decentralized exchanges typically offer a much wider palette of cryptos to trade, as well as access to a growing number of other digital assets, such as non-fungible tokens (NFTs). A centralized cryptocurrency exchange like Coinbase might offer 150 to 200 different crypto tokens to trade, but a decentralized cryptocurrency exchange like Uniswap can offer nearly 1,000 crypto tokens. For individual investors who trade only a few of the biggest-market-cap names, this might not matter. But for serious crypto traders, the depth of options on decentralized exchanges simply can't be matched.
Why Uniswap is best-in-class
In terms of size, Uniswap is the largest decentralized exchange by daily trading volume. In fact, more Ethereum (ETH 2.37%) gets traded on Uniswap in a 24-hour period than on Coinbase. Right now, Uniswap has about 53% of the trading on decentralized exchanges, with the next-closest competitor being PancakeSwap (CAKE 0.81%), with 7.7% of the market.
What makes Uniswap unique is that its future ambitions include more than trading just cryptos. In 2022, Uniswap made a pivot into NFTs and other digital assets and announced plans to significantly boost the trading of digital tokens. To further this strategy, Uniswap recently lined up $165 million in venture capital financing.
This is not to say that Uniswap's position is by any means protected from other competitors. There are many different exchanges (both centralized and decentralized), and what matters to the individual investor are factors such as speed and ease of executing each trade, liquidity, access to as many coins as possible, and pricing. For Uniswap to remain at the front of the pack, it will need to remain best in class in as many of these categories as possible. Keep a close eye on Uniswap's share of total trading volume on decentralized exchanges. Back in October, this share was 64%, but it now has fallen to the low 50% range.
Time to buy Uniswap?
Not surprisingly, Uniswap started to really make headlines around the time of the FTX collapse. If any event crystallized the difference between trading on a centralized exchange vs. trading on a decentralized exchange, it was the epic meltdown of FTX.
While Uniswap is up 34% year to date, keep in mind that many cryptos have had a great start to 2023. At a time when there is still great uncertainty in the crypto market, Uniswap is particularly sensitive to swings in crypto sentiment.
That said, I'm tremendously bullish on Uniswap right now. It is a best-in-class decentralized exchange with a dominant market share at a time when decentralized exchanges are having a moment. While this trend could change, right now it seems Uniswap is unstoppable.
