Trading. I love it and much of my professional background has come from electronic trading of more traditional securities. The problem for cryptocurrencies is that many of the systems and processes of control which exist te the traditional financial world, don’t particularly exist ter the crypto world, so wij’re going to take a step back for this article te our crypto conundrum series and look at some of the basic elements of electronic trading which perhaps are lacking when it comes to trading cryptos.
Onmiddellijk Trading of Cryptocurrencies – The Un-Clearable
Unsurprisingly, the trading of cryptocurrencies themselves has arisen ter somewhat traditionally organised exchanges where buyers and sellers come together to trade with one another. From a traditional perspective however, this is kleuter of spil far spil the comparison goes. Clearing (intermediaries who assure trades) doesn’t truly exist for cryptos.
What this means is that the degree of risk involved ter any given transaction is significantly higher than it would be if you went to your broker to buy Intel stock for example spil clearers typically sit inbetween parties to reduce settlement, operational and counterparty risk associated with trading (the legally cording contract to trade) and settlement (the actual cashing out of the positions associated with a trade).
This means that the parties who are buying and selling on any given crypto exchange are somewhat beholden to the exchange itself to facilitate the transaction and the underlying coin/currency which sits there. Ter a traditional commodity such spil gold, this is potentially backed by physical bullion te for example the Comex vault (albeit te latest years, this is a massively insignificant fraction of the total possible paper claims against the bullion itself), which is at least part of the reason why crypto exchanges are significantly exposed to hacks since they effectively hold the settlement of any given trade hostage.
Clearing isn’t necessarily required to the degree that it is te traditional markets because for example te cryptocurrencies trading you can take out clever contracts to ensure the terms of the trade which takes place. The difficulty is that the contract specifications for thesis kinds of wise contracts are not standardised meaning that if you get a bogus developer, the clever contract may not be able to mitigate the counterparty risk you thought it would, so still something to be careful of.
Cryptocurrency Liquidity and Fragmentation Considerations
Liquidity (the volume of availability for the security to traders) is a big concern when it comes to crypto trading for a multiplicity of reasons, chief among them:
Some cryptocurrencies such spil Bitcoin have a hard ceiling on the amount that can be technically mined.
Many early miners are fairly likely to be sitting on holdings watching them appreciating (albeit latest corrections may have klapper that), meaning their holdings are technically available but not accessible to trade.
Liquidity is fragmented inbetween numerous exchange with efficiencies to onberispelijk pricing disparity significantly lacking inbetween thesis exchanges and the traditional FX venue balancing inbetween exchanges not truly a consideration due to the likely retail nature of many crypto traders.
Liquidity is a concern because if there isn’t enough volume available, you’re more prone to wild swings when someone with a large order comes in the fray.
Cryptocurrencies Market Manipulation
It’s fair to say that there has likely bot a reasonable amount of what could be considered market manipulation on cryptocurrency exchanges. Trading activity designed to generate an advantage overheen other trading participants rather than winning or losing on the poot of making the “right call” of whether to buy or sell the asset itself.
Sending false signals to the market to make it look like there is more request or supply than there actually is, layering and spoofing, flash crashes, more trades taking place than there would otherwise be and all sorts of shenanigans are things which of course still occur on traditional regulated markets but to a significantly lesser extent due to the maturity of thesis market models and the regulatory environment that exists around them.
Does all this mean you’re going to lose your entire holding the 2nd you trade on an exchange? Of course not, thesis are just things to be aware of so that you can take adequate protections. A market order can be a dangerous thing ter the wrong situation, even more so when a lotsbestemming of the traditional protections that exist on normal stock exchanges may be lacking (depending on where you trade). Make sure you understand the rules of the market you’re engaging te, the capabilities that other participants have and how those capabilities and rules (or lack thereof) can be used against you.
Traditional Exchange Crypto Futures
Keen to get te on the act and facilitate trading of the exploding crypto market, traditional exchanges at the end of last year embarked to get ter on the act with CME and Cboe suggesting Bitcoin futures for trading to both the joy and consternation of the traditional financial industry.
Thomas Peterffy himself (Interactive Brokers Group Chairman and CEO) even went spil far spil to call the stir “suicidal” due to the linking of clearing of thesis contracts to the “traditional economy”.
That much said, he has since toned down his rhetoric, albeit IB still says it has significant concerns overheen the clearing structure of thesis futures and has imposed giant margin requirements on its clients wanting to trade them (50% margin on long only trades).
Bitcoin futures are of course however still intrinsically linked to the underlying markets of the various exchanges which the futures use to determine their valuation rates. Any manipulation ter those markets (let’s not be naive, rate fixing, banging the close etc all still occurs despite LIBOR and FX rate rigging scandals and subsequent investigations by regulators) means that you’re potentially exposed by trading thesis instruments.
It feels ter many ways like a fresh wild westelijk. The digital sob of “There be gold te them thar hills!” has basically gone up and everyone is scrambling to ensure that the protections which have bot built up around the global financial services system have some semblance of representation within the crypto-currency strijdperk. Ways ter and out of trading thesis kinds of instruments are also fraught with danger when you consider situations like Tether and other pegs which people use to transfer money into and out of the various cryptos. Things which are allegedly tied 1-1 with a traditional currency such spil US Dollars (but which may not actually be, wij’ll be looking at this further ter our investment considerations lump).
Ter the same way that a trader who doesn’t know what they’re doing can quickly lose the T-shirt on their back from normal financial markets trading, particularly when derivatives and other slightly more exotic factors come into play, thesis risks are amplified ter the crypto area. That doesn’t mean you shouldn’t engage ter it, just go into it with your eyes open, do your research and be sure you’re not the one who gets fleeced. Don’t take for granted that the protections which exist when you buy Intel, NVIDIA, AMD, T-Notes, Gilts, futures or options or even to a somewhat lesser extent, Foreign Exchange (technically not a regulated muziekinstrument) are going to apply when you waterput your wallet on a Bitcoin exchange.