Tag: BTC

Lack of Market Makers in Crypto Trading Contributes to Volatility

Lack of Market Makers in Crypto trading assets further contributes to the destabilization. From my perspective, I get constant notifications from Coinbase that tell me the last N hours had a price difference of +/- NN%. Typically 5% plus or minus. To me, these are erratic swings in prices make it very hard to predict from a short or long term perspective what the trajectory is for these cryptocurrencies. In the equities markets, there is a concept of “Market Maker” that exists to help limit the price variation, i.e. volatility. Below is a brief explanation of the Market Maker, and one capital management firm that claims they are a market maker for cryptocurrencies.

What Is a Market Maker

A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the bid–ask spread, or turn.  The function of a market maker is to help limit price variation (volatility) by setting a limited trading price range for the assets being traded.

In U.S. markets, the U.S. Securities and Exchange Commission defines a “market maker” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price. A Designated Primary Market Maker (DPM) is a specialized market maker approved by an exchange to guarantee that they will take a position in a particular assigned security, option, or option index.

KEY TAKEAWAYS

  • A market maker is an individual participant or member firm of an exchange that buys and sells securities for its own account.
  • Market makers provide the market with liquidity and depth while profiting from the difference in the bid-ask spread.
  • Brokerage houses are the most common types of market makers, providing purchase and sale solutions for investors.
  • Market makers are compensated for the risk of holding assets because a security’s value may decline between its purchase and sale to another buyer.
  • While brokers compete against one another, specialists post bids and asks and ensure they are reported accurately.

Market Maker – Bluesky Capital Management

Liquidity problem for Token Projects

Many token companies raised a substantial amount of capital during the past 2 years. Unfortunately, many of them faced the following challenges:

Lack of liquidity: investors and project founders could not monetize their investment due to a lack of liquidity in their token
Low trading volume: traders and investors are not incentivized to trade the token because of high transaction costs due to market impact
Price manipulation: low liquidity makes it easier for bad actors to manipulate the price of a token
Low interest in the token project: difficulty in liquidating positions makes investors less likely to invest in a token project after launch
Difficulty listing on major crypto exchanges: lack of market makers and committed liquidity in a token makes it more difficult to list on major crypto exchanges, giving less visibility and interest in a token project

Market Making Program for Token Projects

By adopting a market maker who provides liquidity on pre-agreed terms, token companies can potentially expect the following benefits:

  • Higher liquidity: by having enough liquidity available in the token, investors and founders can invest or liquidate their positions more easily
  • Higher trading volume: higher liquidity potentially attracts more interest and trading in the token due to lower transaction costs and market impact
  • Lower probability of price manipulation: higher liquidity makes it more difficult to manipulate the price of a token since more capital is needed to move prices
  • Higher interest in the token project: more people trading in the token and possible listing on bigger exchanges create more interest and discussion around the token project
  • Easier listing on major crypto exchanges: more reputable crypto exchanges are more likely to list a token on their platform knowing that there is a market maker committed in providing liquidity 24/7

Market Making Program for Crypto Exchange

Bluesky Capital can support both established and new crypto exchanges to help them achieve the following potential benefits:

  • Higher trading volume: traders are more likely to trade a cryptocurrency if there is enough liquidity available because of lower market impact and execution costs
  • Lower probability of price manipulation: higher liquidity makes it more difficult to manipulate the price of a token since more capital is needed to move prices
  • Higher interest in the crypto exchange: usually liquidity attracts more liquidity, and at the same time more interest from traders and associated revenues for the exchange

How does Crypto Market Making Work?

Market making consists in providing liquidity on a defined cryptocurrency by submitting both bid and ask limit orders on a crypto exchange. Market makers make a profit by collecting the bid-ask spread over multiple trades. Fast and stable technology and proper risk management are essential to make markets successful.

Lose Ambiguity for an Increase in Market Stability?

Remember, the US Securities and Exchange Commission nor any other regulatory body does not have oversight over Crypto Exchange Markets. There is no “market maker” that is designated as a primary market maker (DPM), a specialized market maker approved by an exchange to guarantee that they will take positions in a particular assigned security, or in this case, a crypto token.

Buyers and sellers need not shed their ambiguity to gain DPM exchange/market stability, just the one (or more) designated “market makers” authorized by the crypto exchanges to become market makers. Only these individuals, brokerages, or other managed funds need to reveal their crypto account IDs, which should reinforce/reflect confidence in the market. By these players entering the market as DPMs, and publicizing their roles, volatility should decrease over time.

All other buyers and sellers can remain anonymous; that doesn’t change.

Good til Canceled (GTC) Crypto

Core Trading Platform, First and Foremost

In part, I blame the uneducated/uninformed investor for taking a loss on the downturn of Crypto. Shame on us. On the other hand, the crypto currency exchange markets, such as Coinbase, make it so easy to make a purchase of Bitcoin. The Coinbase exchange, iPhone app provides a “Simple” trading screen so none of the “Advanced” features are present. In fact, the Coinbase iPhone app doesn’t even expose/mention the more “Advanced” capabilities which, if leveraged, could have prevented investors’ significant losses.

If any type of regulatory body, such as the U.S. SECURITIES AND
EXCHANGE COMMISSION (SEC) steps in to attempt to regulate these crypto exchanges, there are several minimally intrusive opportunities to prevent a “crypto crash” in the future. A few suggestions:

  • Education, specifically around hedging risk by using features already built into the crypto exchange platforms, such as a “Stop Limit Order”. Curtailing risk in the future may look like a required one hour online course and quiz before allowing an investor to execute transactions. For example, the Series 7, General Securities Representative Qualification Examination.
  • Temporary halt in trading like we see within stock markets. For example, volatility halts are single stock circuit breaker halts that trigger 5-minute halts on fast price spikes or drops that exceed the acceptable trading price range (ATPR) for 15-seconds. The ATPR is calculated as the average price of the previous 5-minute trading period.
  • Financial products available to the retail investor for hedging crypto losses, e.g. currency swaps but using crypto on one side of the swap?
Opportunity to Hedge Cryptocurrency Losses and Volatility

When buying stocks, traders have the ability to put in buy and sell orders that expand beyond real-time (i.e. current market value) or end-of-day (EOD) transactions. A SELL order that remains open allows the trader to minimize his risk by stating the amount he is willing to lose. For example, a SELL order can specify the stock price to exit the position and the volume owned to sell, i.e. total or a subset of stocks owned.

Traders can also put in a BUY order, good until canceled, allowing a trader to specify when he is willing to take a position in the stock.

What is a Good Til Canceled?

Good til canceled (GTC) order is an investment order to buy or sell a security or stock at a specified set price that remains in effect or active until it is executed, or the investor cancels the order.

https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/good-til-cancelled-definition

It was unclear to me from the Coinbase.com documentation how long the Limit Orders are good until. Limit Orders have the potential to minimize your risk exposure.

Limit orders: Limit orders allow you to manually select the maximum price for your buy order and minimum price for your sell order — it will execute only if that price is hit (which means there’s no guarantee your trade will be executed). As a buyer, you might want to use a limit order if you believe the market is moving lower. One important thing to remember: all the prices you see in the order book all represent limit orders, because market orders get filled right away.

https://www.coinbase.com/learn/advanced-trading/what-is-an-order-book

What is a stop limit order?

Stop-limit orders allow you to automatically place a limit order to buy or sell when an asset’s price reaches a specified value, known as the stop price. This type of order can help traders protect profits and limit losses.

https://www.coinbase.com/learn/advanced-trading/order-types#stop-limit-order

I reached out to Coinbase Support on Twitter for comment regarding how long limit orders are good until, and they responded swiftly, “Good til Canceled” as I would expect. Excellent support.

Hi there, happy to answer your question about limits orders. You are correct, they are good til canceled: if posted, the Order will remain on the Order Book until canceled by you (the Trader). Hope this helps, all the best!

@CoinbaseSupport

Disclosure

Content is for informational purposes and is not investment advice. Investing in crypto comes with risk.

Bitcoin has Dropped 52% since Jan 14 2022

On November 9th, 2021, Bitcoin BTC was valued at ~67k. I waited and bought in on January 14th at 43k. BTC. Like many others, I continued to buy in “on the dip” with an overall moderate investment. Months later I am in disbelief at the deep devaluation of cryptocurrencies across the board, specifically BTC, which I thought would be the best crypto to steer clear against significant loss of value.

In Bear Markets, Investors Shift from Equities to other Asset Types. Why not Crypto?

Commodities, Oil, Precious Metals, and the like are typically the safe haven when there is an equities bear market in effect. It appears Cryptocurrencies as an “asset class” don’t share that same safe haven status. Why not?

Crypto not Sustained by Global Black and Grey Market Transactions?

Lots of illegal and grey area transactions in the world where anonymity should bolster the market evaluation of Cryptocurrencies, but that’s not what we see here. Clients may be shifting/leveraging more traditional ways in finance/trade which have low tech solutions, and countries/territories with loose banking regulations. It may even be beneficial to induce a cryptocurrency crash to reinvigorate the traditional approach that institutions and individuals that broker these opaque transactions.

Are we in a cryptocurrency bubble, bursting in progress?

The housing market will continue to go up. Why not cash in on a variable rate with a loan of over 90% of the house asset. Sound familiar?

Cash is King: “On Demand” Cryptocurrency Transactions

In the new world of Cryptocurrencies, leverage a “Just in Time” crypto transaction going from cash to crypto and back to another currency held in ringfenced countries with loose regulations. Holding long term assets that are affixed to cryptocurrency, such as NFTs, should be a relic of the NFT evolution. Assets, digital and physical, should appreciate over time without the impediment of a highly volatile, underlying currency.

Volume and Volatility

Significant volume trading drives price speculation upward or downward. Electronic trading tied to financial models for trading execution could make the underlying asset wildly volatile, especially with a relatively new asset class, such as cryptocurrency. Conflicting financial models could appear to be as a Tug of war maintaining both maximizing asset value and liquidity.

Influential Events – Impact on Markets

Sometimes there could be a direct correlation between an event, such as a drop in the temperature, which impacts the price of buying gas (i.e. heating) commodity. Sometimes events, such as the drop in cryptocurrency, are not readily transparent on the open markets, and have assets wildly traded based on spec. As romantic as it sounds, we need not look at the “butterfly effect” to grasp the windfall of the BTC current value.

Invasion of Ukraine by Russia

It’s very possible that countries, and their ultra wealthy citizens could have significantly “bought in” on cryptocurrencies, especially at the height of the valuations last year, and now with a war in their backyard feel more comfortable with traditional, safe haven, assets, and are backing out of their positions. If trades are unwound to fast, it could drive the price of the asset.

Bolster National Economies of South America

Some countries have sought to adopt cryptocurrencies in lieu of their native currency in order to prevent against sky high inflation. If one country, such as Russia, and their Russian oligarchs decide to pull out “liquidate” vast volumes of cryptocurrency driving the price down, there will be significant impact to nations who have adopted the cryptocurrency in lieu of their own. Devaluation of the asset verses unmanageable, high inflation.

Price of Crude Oil, and Gas at all Time High

Crude Oil has been on the rise since April 2020 from ~ 16 USD to the 52 week high of ~130 USD. Has supply and demand had a major impact to oil prices, shifting from crypto? Is/was the pandemic a driver? Less travel, weakening demand. Tightening supply from Russian sanctions on Oil And Gas shifting spending from crypto to oil?

Price of Goods and Services increases by significant Inflation

Saying the value of goods and services are effected by the events around us is a fair assessment. Looking at the most basic of consumer flows, farm to plate, butter and milk have seen prices risen. Less money available for investments due to a rise in nondiscretionary spending?

Shoppers across America are noticing inflation in prices on many everyday items, and milk got its moment in the spotlight after a CNN interview with one family went viral. It’s true: retail prices for a gallon of milk are up 26% at an average of $3.59 since bottoming out at $2.84 in July 2018.

OC Register

Derivatives – Currency Swaps to Hedge Crypto Risk?

There have to be financial instruments available, or can be packaged to balance the adverse effects of a very volatile cryptocurrency. How accessible are these financial products to the “common” investor, is beyond my speculation, but these are stop gap efforts, and will not resolve the underlying problem with cryptocurrencies.

Artificial Inflation, Pumping in additional BTC by Mining Crypto

I’m not saying this is a “thing” based on other posts and popular opinion, but it could be a factor, at least as an artificial reason / sentiment to flee crypto.

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