Even in cryptoland — history is in danger of repeating itself
Despite the emergence of a revolutionary financial technology that could change the world of economics — people are still people, and the old tricks like bucket shops and bank runs die hard.
(These insights first appeared in Element Group Asset Management’s Weekly Thoughts)
What are driving prices right now are modern day bucket shops
Some exchanges are currently operating as modern day bucket shops. They offer retail investors the chance to place short term bets on daily price movements with considerable leverage. The daily trading activity for these instruments can result in extreme price moves in the underlying price of the asset on other exchanges that are more regulated.
We make this distinction not from a legal perspective. But we are traders and risk managers, and we work in a regulated space, so we have to follow the rules. We make decisions based on data and market psychology.
With that being said, we are the first to admit that the market is still nascent and that market microstructure has a long way to go before being fully efficient. But we believe that a dynamic where side wagers on the price of crypto become so large that they drive the actual price of the digital asset will hinder this road to price discovery efficiency.
We believe in speculation and we think sophisticated market participants should use leverage, but we don’t believe it should exist like this. Hopefully the derivative market matures in the next few years.
The start of a modern day bank run is what we are seeing right now
Bitfinex has slowly evolved over the years as a consistent top tier exchange by traded volumes (averaging $450M/day). Though the firm has seen its fair share of issues in the past, they have slowly pushed forward with ample volumes and a UI/UX that made for very easy trading. In the past few months however there’s been an uptick of fear regarding the exchange.
Close ties to Tether and Noble Bank have attracted a fair amount of FUD for Bitfinex, with many on social media starting to question its stability. This whole thing started with news that Noble Bank was being put up for sale. Add to that the most recent news that Bitfinex has been temporarily suspending activity and what we have is the masses questioning Bitfinex’s solvency.
This is causing uncertainty in the market, with many looking to withdraw funds from the exchange in order to eliminate risk. We’re seeing less of a capital flight and more of an all out race to get into fiat and derisk away from crypto exposure. This is not ideal.
We believe it will come down to the fate of Tether. How this plays out is two-fold. If Tether is able to prove that there is USD to backup USDT, that will bring confidence into the marketplace and in Bitfinex. On the other side, if Tether is indeed a fraud, then this mild bank run will turn into a full blown panic with everyone racing for the exits (and nobody wants to be the last person selling).
Conclusion
Crypto traders might like to think they’ve evolved with this new and revolutionary financial system, but evidence indicates that old habits in financial markets die hard. Are we really capable of moving beyond old-school tactics in the digital asset space without being legislated — or is this where the industry realises that some regulation may indeed assist with progress?
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Any thoughts on bucket shops and bank runs in the crypto industry? Comment below.
