The crypto markets are taking time to recover. Although the total market cap is still above the prized $200bn mark – and has been now for over two weeks – $20bn is not a comfortable margin. One bad day, or a mass sell-off, could send prices spiralling, leaving frustrated traders and demoralized investors in its wake.
To prevent anymore wild market fluctuations, the sector is moving to crypto dark pools. Venues where order books are kept hidden, both Bitfinex and Kraken began offering dark pool facilities back in 2015. Their numbers are on the rise.
Republic Protocol launched their own RenEx dark pool last week. It uses a hidden order book so none of the trades taking place on the platform can be observed by third parties. A hidden order book adds an element of privacy, but more importantly, it enables large trades to take place without significant repercussions for the wider market.
Open Order Books Create Volatility
$12.5bn’s worth of crypto has exchanged hands in the past 24 hours. The vast majority of this takes place on exchanges. These are public venues, meaning the buy and sell orders are on display for all users. It indicates to traders what the level of demand is for a particular asset and shows how much is being sold, at the same time.
There are benefits to a public order book; it creates an accurate and sensitive free market price. Investors can very quickly determine what the going rate is for a digital asset if all trades are out in the open. Cryptocurrencies are volatile so this price will change daily (if not hourly), but it can create a level playing field with fair prices.
That is unless some big investor dumps all of their holdings onto the market at the same time.
Markets for individual coins can be very vulnerable to downward trends. The momentum to sell soon picks up if the price begins to fall; public order books, where all trades remain visible, exacerbate this problem. This can be worse if one party tries to sell a substantial volume of assets all at the same time. The sudden influx would damage liquidity and could provoke market-wide sell-offs as other traders try to flog their holdings before the price falls too low.
On Wall Street, this is known as a ‘cannonball’
Crypto dark pools benefit the market.
Large sell orders hurt the market. Since September of last year, representatives for the now-defunct Mt. Gox cryptocurrency exchange have been slowly trying to sell all of the company’s significant Bitcoin (BTC) and Bitcoin Cash (BCH) holdings. The trustees managed to sell around about $400m’s worth just in the first quarter. Bitcoin’s price had already been on a negative trajectory, but the sudden increase in the amount entering the market would have driven the price down even further.
Crypto dark pools, where large trades remain hidden, benefit the market. Mass sell-offs are unpredictable and the fear of plunging value prevents more investors entering the space. Similarly, they enable better market stability. Without large orders creating wild fluctuations, prices are likely to reach an equilibrium with gradual changes over time rather than a sudden 10% change. Volatility benefits speculators and risky traders, but it cannot be the groundwork for a sustainable cryptocurrency market.
With crypto dark pools, the market can build solid foundations. Castles strong enough to withstand cannonballs.
Disclaimer: The author is not invested in any cryptocurrency or token mentioned in this article, but holds investments in other digital assets.