The strong growth of the huge cryptocurrency market has brought Bitcoin to the forefront of the investment arena. Despite growing regulatory concerns, multiple FUDs, longer periods of consolidation, and declining market forecasts. Put simply, Bitcoin seems to stand the test of time.
Due to market developments, however, terms that are constantly repeated in the context of the crypto market are often misinterpreted or misrepresented. One of them is dark trading.
Dark trading or dark pools have been around for a long time in the traditional investment sector. Dark pools are essentially private exchanges that operate independently of public exchanges such as the NYSE and NASDAQ. However, the advent of dark pools in the crypto market is a relatively new phenomenon, with many gray areas surrounding their existence.
This article looks at dark pools in the crypto space and how they could affect Bitcoin and other cryptocurrencies in the long term.
How do dark pools work in the crypto space?
First, let’s get one thing straight.
Dark Pools is neither connected to the Darknet nor to dubious trading methods. Although the term may seem vague, it is only about trading platforms for the more anonymous trading of cryptocurrencies. In fact, exchanges like Kraken started offering dark pools for crypto trading in 2016.
Bitfinex currently offers similar services, while broker-dealer TradeZero launched its trading facility Dark Pools in 2016 with Jered Kenna.
These liquidity pools are not transparent. For this reason they are called “Dark” to describe their opaque nature. Large institutes or institutional investors can trade in large volumes anonymously and discreetly. An estimated 15% of the total trading volume of the US exchanges takes place in dark pools, some estimates assume up to 40%.
When dark pools were introduced into the crypto space, they were seen as the answer to the liquidity problems that have long plagued the crypto space. Liquidity is a constant issue in the crypto space as it is widespread among exchanges.
This often discourages large investors from entering the market or executing orders without affecting price or trading dynamics.
Advantages and disadvantages of dark pools
Dark pools were originally introduced to minimize the market impact of displaying institutional trade orders on different platforms. For example, if a huge bitcoin sale is made on a cash exchange, it will significantly affect the price and lead to slippage. However, there were issues with pricing in dark pools.
While dark pools trading is usually done by matching the best bid and ask prices, anonymizing and transferring large amounts of Bitcoin or other cryptocurrencies can lead to many imbalances in the cryptocurrency. This can have a detrimental effect on prices on the market.
In addition, their average transaction size has decreased significantly since dark pools appeared in the general market in the 1980s. 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 harmful to the broader market.
Dark pools are also not safe from official controls
Just like the huge cryptocurrency market, dark pools are unpopular in the eyes of the SEC and other regulators. In a recent exchange, Gary Gensler pointed out that dark pools have recently become increasingly popular with retail investors. He also strengthened the SEC’s role in “protecting against fraud and manipulation, regardless of whether it is done by investors and large mutual funds.”
Dark Pools was targeted by lawmakers after the $ 20 billion collapse of investment firm Archegos Capital Management. However, these concerns do not appear to have disrupted the market yet.
Indeed has a report emphasize that around 8% of the volume was traded via dark pools in 2019, around 5% in 2017 and not yet published in 2014. This means that dark pools trading in the crypto market has increased by more than 3% in less than a year.
It can therefore be assumed that at least 10% of the transactions take place via dark pools. While there is no concrete data, the emergence of dark pools and institutional investors shows it.
Compared to dark pools in the traditional market, the cryptocurrency dark pools has the advantage of digital verification. In addition, the linked protocols help to enable pricing in line with the market for all participants by preventing manipulation.
In addition, it is expected that the further development of cryptographic verification methods will make dark transactions more secure through the use of an open source protocol. This can check that the same rules are being followed for every buyer and seller.
For the crypto market, a relatively new and highly volatile market that is already plagued by problems such as pump & dump and conventional FUD, a concept like dark trading seems less bad.
Consider the example of Elon Musk, who raised environmental concerns about Bitcoin mining in May: The entire FUD resulted in the price of Bitcoin falling nearly 40% for the month.
Now imagine all the sales on the spot exchanges. Hence, the amount of Bitcoin going in and out of the exchanges plays an important role in price development and then the rest of the market.
The main idea of dark pools is anonymity. However, for many in the market, it seems to contradict the principles by which blockchains are built, one of which is transparency.
It is worth mentioning here that blockchains with pseudonyms are structured transparently. This in turn means that transactions that are 100% transparent cannot be pinned to specific actors.
Can dark pools shed light on the future of Bitcoin?
Now the bigger question remains whether the increasing trend in dark pools trading, coupled with narrowing spreads and fewer opportunities for simple linear arbitrage, suggests a market: Will cryptocurrencies mature or not? In general, the answer to this question is – YES.
The market fragmentation corresponds to the core values of blockchain, decentralization, non-fragility and reduced reliance on trustworthy controllers. Dark pools act as niche platforms for various investors and traders. In a way, the so-called fragmentation and redirection of volume stands for decentralization.
Also, there is no particular reason to be suspicious of dark pools at the moment, especially since they act as an alternative design and platform in the market.
There is a great likelihood that Bitcoin’s future growth trajectory will come with the diversity, fragmentation, and growth of the market. Additionally, trading dark pools can help grow the larger market by providing institutional investors with an anonymous platform.
Currently, the increasingly progressive landscape and the increasing activity of the dark pools are indicative of the maturity of the crypto market. This is, without a doubt, a good sign for Bitcoin and the wider market. This could also fuel the narrative that Bitcoin is becoming a traditional asset class.
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According to ABMCrypto