The strong growth of the vast crypto market has pushed Bitcoin to the forefront of the investment arena. Despite growing regulatory concerns, multiple FUDs, extended periods of consolidation, and bearish market predictions. Simply put, Bitcoin seems to be standing the test of time.
However, based on market developments, terms that are constantly repeated in the crypto market context are often misunderstood or misrepresented. One of them is Dark Trading.
Dark Trading or Dark Pools has existed in the traditional investment arena for a long time. Dark Pools are essentially private exchanges that operate independently of public exchanges like the NYSE and NASDAQ. However, the emergence of Dark Pools in the crypto market is a relatively new phenomenon, with a lot of gray areas surrounding their existence.
This article will take a look at Dark Pools in the crypto space, and how they could affect Bitcoin and other cryptocurrencies in the long run.
How do Dark Pools in the crypto space work?
First, let’s make one thing clear.
Dark Pools is not affiliated with the darknet or with any shady trading methods. While the term may seem rather vague, they are simply trading platforms for trading cryptocurrencies more anonymously. In fact, exchanges like Kraken started offering Dark Pools for crypto trading in 2016.
Currently, Bitfinex offers similar services while broker-dealer TradeZero launched its Dark Pools trading facility with Jered Kenna in 2016.
These liquidity pools are not transparent. This is why they are called “Dark” to describe their opaque nature. Large institutions or institutional investors can trade in large volumes, anonymously and discreetly. An estimated 15% of total US stock market trading volume takes place in Dark Pools, with some estimates putting the volume as high as 40%.
When Dark Pools were introduced to the crypto space, they were seen as the answer to the liquidity problems that have plagued the crypto space for a long time. Liquidity has been a perennial issue in the crypto space as they are widely distributed among exchanges.
This often discourages large investors from entering the market or executing orders without affecting price or trading dynamics.
Pros and cons of Dark Pools
Dark Pools were initially introduced to minimize the market impact of displaying institutional-sized trade orders across platforms. For example, if a huge Bitcoin sale is made on a spot exchange, it will significantly affect the price and create slippage. However, there have been issues with price discovery on Dark Pools.
While trading in Dark Pools is usually done by matching the best bid and ask prices, anonymizing and transferring large amounts of Bitcoin or other cryptocurrencies can cause a lot of imbalances in the cryptocurrency. supply. This can have an adverse effect on prices in the market.
In addition, since the appearance of Dark Pools on the general market in the 1980s, their average transaction size has decreased significantly. This means that Dark Pools are not only used by financial institutions with large transaction sizes. In a way, it also makes the existence of Dark Pools trading less attractive and detrimental to the broader market.
Dark Pools are also not safe from regulatory scrutiny
Just like the vast cryptocurrency market, Dark Pools are also unpopular in the eyes of the SEC and other regulators. In a recent exchange, Gary Gensler pointed out that Dark Pools have become increasingly popular among retail investors in recent times. He also enhanced the SEC’s role in “protecting against fraud and manipulation, and whether that’s from investors and large market mutual funds.”
Dark Pools has been targeted by lawmakers in the wake of the $20 billion collapse of investment firm Archegos Capital Management. However, these concerns do not seem to have bothered the market yet.
In fact, one report highlighted that around 8% of volume was traded through Dark Pools in 2019, around 5% in 2017 and hasn’t appeared yet in 2014. This means Dark trading. Pools on the crypto market have grown by more than 3% in less than a year.
Therefore, it can be safely assumed that, at least 10% of transactions take place through Dark Pools. Although there is no specific data, the emergence of Dark Pools and institutional investors shows it.
Compared with Dark Pools in the traditional market, Dark Pools cryptocurrency has the advantage of digital verification. Furthermore, the linked protocols help to facilitate fair market pricing for all participants by eliminating the possibility of manipulation.
In addition, the constant development in cryptographic verification methods is expected to make Dark transactions more secure with the use of the open source protocol. This can verify maintaining the same rules for every buyer and seller.
For the crypto market, a relatively new and highly volatile market that is already plagued by problems like Pump & Dump and conventional FUD, a concept like Dark Trading seems less of a bad thing. more harmful.
Consider the example of Elon Musk raising environmental concerns over Bitcoin mining in May. The entire FUD caused the Bitcoin price to drop by almost 40% in the month.
Now, imagine all the selling going on on spot exchanges. As such, the amount of Bitcoin coming in and out of exchanges plays an important role in the price trajectory and subsequently the rest of the market.
Now, the main idea behind Dark Pools is anonymity. However, to many in the market, it seems like it defies the principles by which blockchains are created, one of which is transparency.
Here, it is worth noting that blockchains are built to be transparent with pseudonyms. This, again, means that transactions while being 100% transparent cannot be pinned to specific actors.
Can Dark Pools shed light on Bitcoin’s future?
Now, the bigger question remains whether the increasing trend in Dark Pools trading, coupled with narrowing spreads and less opportunity for simple linear arbitrage, is indicative of a market. Is cryptocurrencies maturing or not? In general, the answer to this question is – YES.
Market fragmentation is true to the core values of blockchain, decentralization, non-fragility and reduced dependence on trusted controllers. Dark Pools act as niche platforms for different investors and traders. In a way, the so-called fragmentation and diversion in volume represents decentralization.
Plus, for now, there’s no particular reason to be suspicious of Dark Pools, especially since they act as an alternative design and platform in the market.
There is a very strong possibility that Bitcoin’s growth trajectory in the future will run in tandem with the diversity, fragmentation, and growth of the market. In addition, trading Dark Pools can contribute to the growth of the larger market by providing institutional investors with an anonymous platform.
Currently, the increasingly progressive landscape and increasing Dark Pools activity indicate the maturity of the crypto market. This is without a doubt a good sign for Bitcoin and the broader market. This could also push the narrative of Bitcoin becoming a traditional asset class.
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According to ABMCrypto
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