The Inefficiencies in Trading Crypto
The Ten Issues Hurting Crypto Trading and Price Discovery
To outsiders, trading often looks like one big money grab between punters twitching at every tick. Then, what to make of trading cryptos? How to grasp exchanging abstract, digital currencies that will never fit in your back pocket?
Simply put: a lot of people don’t.
Which explains crypto traders being dismissed as “amateurish” or branded as “degenerate”. Yet, in bulk, their gambles pinpoint an invaluable notion: the truth.
In trading, “the truth” represents the most accurate price for anything. The price equilibrium is guessed at through industry news, charts, and candlesticks, but finding it requires relentless trading. To the death — or until margin call.
Cruel though it may be, the crypto market is the best teacher. Yet, its lessons can be needlessly harsh when traders are hindered in their passion to trade.
Inadvertent or intentional, let’s explore the inefficiencies in price discovery.
Problem 1#. Unstable Services on Exchanges
Restlessness — both a burden and a blessing on the ever-ticking market, is characteristic of lags plaguing crypto exchanges today. Consistently unreliable, some exchanges make for a rattling trading experience. On top of batching holding up withdrawals and deposits, services sometimes freeze.
While “circuit-breaker” shutdowns exist in classical markets to halt panic selling, the crypto cut-off isn’t a switch but a flaw. In the throes of panic buying, simultaneous orders en masse overwhelm exchanges into a shutdown at the worst possible time. Talk about absence of climax!
Dreading the cutoff, traders tend to rush their trades, thus increasing the chances of a shutdown.
Kraken CEO Jesse Powell blames growing pains on exchanges. In perfect Jevons paradox, any tech improvements allow for traffic beyond what platforms can accommodate. Ironic that the mark of a successful exchange, such as pioneer and giant Coinbase, is to suffer under the brunt of demand.
When trading action is choked, so is the price discovery process. While tech fixes may facilitate flow on exchanges, they can’t help with lag on the blockchain itself.
Problem #2. Bitcoin’s Scaling Problem
Curbed in block size, blockchain tech is limited in number of transactions per second. Upgrades to alleviate pressure on the main-net are underway. Albeit in its infancy, the Lightning Network’s promising second layer solution is poised to eventually become the standard.
On the Bitcoin blockchain, too low a fee guarantees a transaction remain pending hours on end. Wringing FOMO for all it’s worth, exchanges tend to mark up the default transaction fee from US $0.03 to $2. The alternative is a trader’s agony: having to watch prices move against you while the order is pending.
Even with the right fee, confirmation can take up to 30 minutes. Lag being directly correlated to patronage, Bitcoin is the main offender. To avoid confirmation headaches and milk market panic, traders opt for leaving funds on exchanges indefinitely, oblivious of the cyber vulnerability hot wallets entail.
Problem 3#. Custody of Funds
Since we’ll cover crypto custody in another issue, we won’t get in too deep here.
In short, all traders should be aware exchange wallets constitute a risk. To professionals, it’s a calculated risk: the possibility of a hack pales to the certainty of not securing a position.
Sadly, that sound individual reasoning escalates into unsound consequences for the community. Having individual funds scattered — in fact stranded — across different exchanges stunts the number and extent of trades everywhere, thus compromising the liquidity of the entire cryptosphere.
Problem 4#. Liquidity
All crypto traders face a dilemma in liquidity. Too much liquidity, an exchange swells into a honeypot, sweetening till hackers come to collect. Concern over market manipulation aside, the custody qualms raised by the SEC ( U.S. Securities and Exchange Commission) are founded: the Bitcoin ETF (Exchange Traded Fund) wresting their approval will garner unprecedented liquidity, becoming the largest crypto honeypot in the world.
At the other extreme, trading on an exchange with too little liquidity is akin to jumping headfirst into a pool only to discover cold, hard concrete. Albeit a mandatory phase for young exchanges, lack of liquidity is also a well-established issue in crypto. Along with the fantasized bigger market cap, exchanges have come up with short-term fixes to lack of liquidity, each entailing issues of their own.
Problem 5#. Fake Volume
Go-to fix when exchanges run dry, some will argue wash trading was a necessary evil for crypto to evolve as fast as it did. Nevertheless, it is not conducive to a healthy market.
The Blockchain Transparency Institute and Coinone Korea are the best names on the lookout for factitious trading volume. The former has done extensive order book and website traffic analyses, while the latter lists the issues and clues to detect wash trading on exchanges.
Trades made on dishonest exchanges will often result in losses on slippage. Bad for profits, worse for price discovery.
Historically, fake volumes are a lingering plague on the crypto industry!
Example 1, Willy Bot: In a desperate play to dig themselves out of a hack kept from users, bitcoin exchange MtGox created the Willy bot. To boost volumes, the trading bot traded and speculated with the Bitcoin price. It all came to light when Willy contributed to the second Bitcoin bubble from US $30 to $260, thus drawing global media coverage onto itself.
Example 2, Chinese Fake Volume: In an blatant — if not brazen — bait for their services, Chinese exchanges have been faking their volumes by up to 99%.
Example 3, A distorted market cap: For altcoins especially, market caps constitute misleading health indicators. To make a Jimmy Song article short, artificially raising the market cap of a coin won’t increase its actual trading action.
On a more recent note, we feel for anyone that bought into the altcoin craze last year. After having lost 80% to 99% of their value, we are now witnessing these coins fade. A necessary culling for the industry to move forward.
Since providing and hyping coins is left to the discretion of exchange operators, doctoring with newly-minted coins can be tempting. When random coins appear on attractive exchanges, there’s no doubt the right price (*cough* — bribe) was involved. We can’t forget the “mysterious” price spike of Bcash before it was even listed on Coinbase. One year and a hand wave from Coinbase later, the irregularity still hasn’t come to justice.
The market isn’t perfect. Far from it. While the unregulated nature of cryptos can account for some inaccurate pricing, fraud oughtn’t be tolerated. Both fomenting and dismissing market deception will cause the industry to degenerate into a cesspool of insider trading.
Holding exchanges up to the fire is crucial for the market to achieve accountability. But they aren’t the only ones angling to vitiate the market.
Problem 6#. All in!
Similarly to overextending through excessive coin curation, exchanges offering disproportionate financial services put themselves — and all of their users through them — at risk. While hacks are the more frequent affliction, there are other ways an exchange can be foiled.
On July 31st 2018, Hong-Kong based exchange OKEx dealt with such a situation. Moved by the hope of reversal, a malicious intent, or both, a whale refused to flatten a $416 million long position while BTC was plummeting.
Despite a preemptive freeze of the account, the position was force-liquidated too late. The critical flaw laid in that OKEx’s insurance capacity only partially covered their 20x leverage policy. The exchange decided the uncovered $9 million would be socialized with a full account clawback, thus distributing the loss on all profitable traders that week.
While socializing one trader’s loss with a clawback is no shocker, the scale of the loss was enough not only to shake traders’ trust, but also to embolden critics of the crypto markets.
Though regrettable, the OKEx debacle was useful: made aware of the point of failure, the exchange bolstered their risk management policies. First-hand or from the cautionary tale, failure is the greatest step towards improvement.
Problem 7#. Freedom to Fail
In a bid — or guise — to ward off failure, legislation pertaining to cryptocurrencies makes or breaks a country’s chance at being the next crypto valley. When crypto-adverse lawmakers favor stricter legislation, crypto companies end up hemorrhaging money on lawyers and tax navigation, all the while knowing equivalent resources won’t be dedicated to crypto R&D.
Red taped to their breaking point, companies will choose to exile in “crypto friendly countries”, rather than to sink into shifting sands of legislation at home. Although Australian legislation is now more compliant, we’d be remiss to forget CoinJar, at the time one of Australia’s largest crypto businesses, being forced to move to London. Similarly, Binance had to relocate twice, from China to Japan, from there to Malta. Brain drain, anyone?
The paradox goes as far as crypto rich US citizens renouncing their citizenship to escape increasingly intricate tax laws. For lack of bit and bridle on crypto, some officials are looking to nickel and dime traders to death. Despite not being an advocate for Bitcoin, SEC commissioner Hester Peirce does fight for the flexibility to let opportunity thrive. “I think that’s a very dangerous position to put ourselves in, and I think it really does harm investors because it denies them opportunity.” Unfortunately, few commissioners — and even fewer banks — share Ms Peirce’s views.
Problem 8#. Banking and Crypto
Unwilling to back the proverbial crypto horse, banks are known to forbid traders from sending funds to crypto exchanges, to drag out application processes for years, or to outright turn away crypto startups. Australian banks have even been caught closing accounts of crypto-committed customers.
Under the cover of their corporate portfolio, banks love to play keepers — effectively curbing the flow of fiat currency into crypto.
The line between regulation and strangulation is a fine one. Risk-averse behavior from either government or financial institutions is harming fair trade and innovation. For the industry to thrive, traders and crypto businesses need the opportunity to strike out on their own. Freedom to fail is the cornerstone to a self-regulating, competitive ecosystem.
Problem 9#. Lack of trading tools
Speaking of ecosystems, picture a lone fisherman (our regular Joe crypto trader) embarking onto the perpetual pond on a rowboat whilst a massive fishing barge named Goldman Sachs is reeling in shoals of fish from the depths of traditional financial markets. Not the best eco-friendly analogy, but it paints the picture of scale. Indeed, crypto trading tools are rather crude compared to that of financial trading firms.
Most crypto traders, having only experienced the thrill of trading in the crypto world, are not versed in the usual, financial trading tools. You can’t ask for what you can’t imagine. In their defense, why would crypto traders demand sophisticated tools when their main worry is whether the exchange website will even load that day?
Classical exchanges gloating at their crypto counterparts’ struggles should check themselves: if they were truly global and open for trade 24/7/365, they, too, would display the dreaded 404 page.
All in all, as the crypto market keeps on ticking, neither exchanges or traders have the luxury to call a timeout to level up on gear. With crypto, you just gotta roll with the punches; even if you don’t, they keep coming.
Problem 10#. Steep Crypto Learning Curve
Getting into crypto is the easy part, it’s keeping up with the fast technical developments that requires grit! The crypto learning curve is an assault course where you get scraped on slippage and have to crawl through piles of shitcoins.
For people looking to putter in trading, the Internet is brimming with walkthroughs on how to buy one’s first coin. But, for big businesses eager to get up close and personal with crypto, doing so on their own might prove too technical an undertaking. After a few rounds, they’ll be looking for crypto companies in their corner to provide invaluable expertise.
And thus, in this evermore digital age, services spelling out the technical intricacies in crypto will not only make a killing, but also reshape the financial landscape by contributing to crypto going mainstream.
Conclusion
Let’s be honest: it’s all about the coins. Traders don’t trade to find “the truth”. Newbies or whales, they do it for a profit. To accurately price complex assets is a positive side-effect to relentless trading. Therefore, solving these inefficiencies is not merely a service done to traders, but to the financial community itself.
We, for one, are not discouraged by the inefficiencies hindering trading and crypto price discovery. Those very issues, once solved, will turn into springboards ready to launch crypto to heretofore unsuspected heights.
At this point, you may be wondering why list these problems? To rant? To blame? To be right?
None of the above.
Because we’ve experienced these trading inefficiencies first-hand, we feel for traders. As former colleagues, we aim to relieve some of the pressure they are under, as well as to assist in price discovery. These inefficiencies gave us direction to design tools to improve the trading experience. Our latest tool to that end is XRayTrade.
XRayTrade is our rapid crypto trading terminal designed for an intuitive trading experience.
Once API keys are connected to XRayTrade, you’re ready to strap in and trade on multiple crypto exchanges. Survey your overall position on a single screen while the platform’s customizable macros shave time off repetitive orders. A second spared is a second earned. By mastering hotkeys and click trading, you can allot that much more time on strategy.
To learn more about XRayTrade click here. Thanks to our email-only account process, it takes all of one second to sign up.
Ready for your edge on the crypto market?
