The meteoric rise of Bitcoin and the broader crypto-market has propelled the asset class to the forefront of the investment landscape. Despite growing regulatory concerns, numerous FUDs, extended periods of consolidation, and dwindling market anticipation, this has been the case. Simply put, Bitcoin appears to have withstood the test of time.
However, given the market’s evolution, frequently used market terms in the context of the crypto-market are frequently misinterpreted or misrepresented. Dark Trading is one such term.
Dark trading and dark pools have been around for a long time in the traditional investing world. Dark Pools are private exchanges that operate independently of public exchanges such as the NYSE and NASDAQ. The emergence of dark pools in the crypto-verse, on the other hand, is a relatively new phenomenon with a lot of grey areas surrounding their existence.
This article will take an in-depth look at dark pools in the crypto-space and how they can affect Bitcoin and other cryptocurrencies in the long run.
So, how do crypto dark pools function?
First, let me clarify something.
Dark pools have nothing to do with the darknet or any other shady methods of exchange. While the term may appear to be ambiguous, they are simply trading platforms for trading cryptocurrencies anonymously. Indeed, exchanges such as Kraken began offering dark pools for cryptocurrency trading as early as 2016.
Bitfinex now provides similar services, and in 2016, broker-dealer TradeZero launched a dark pool trading facility with Jered Kenna.
These liquidity pools are not open to the public. This is why they are referred to as ‘dark’ to describe their opacity. Large organizations or institutional investors can trade massive amounts of coins in an anonymous and discrete manner. Dark pools account for an estimated 15% of all trading volume in the American stock market, with some estimates putting the figure as high as 40%.
When dark pools were introduced to the crypto-verse, they were intended to address liquidity issues that had long plagued the crypto-verse. Liquidity has long been a problem in the cryptocurrency space, with liquidity being spread thinly across a number of exchanges.
This has frequently deterred large investors from entering the market or executing orders without influencing prices or exchange dynamics.
The Benefits and Drawbacks of Dark Pools
Dark crypto trading was first introduced to reduce the market impact of displaying institutional-sized orders on platforms. For example, a large Bitcoin sale on a spot exchange would have a significant impact on the price and cause slippage. However, while dealing with this situation, there have been price discovery issues on dark pools.
Even though trade in dark pools is frequently accomplished by matching the best bid and ask prices, anonymity and the transfer of large amounts of BTC or other cryptos can cause a significant imbalance in supply dynamics. This could have a negative impact on market prices.
Aside from that, the average trade size of dark pools has decreased significantly since their introduction into the general market in the 1980s. This means that dark pools aren’t just used by large financial institutions. It also makes the existence of dark trading less compelling and, in some ways, more detrimental to the broader market.
Dark pools are not immune to regulatory scrutiny.
Dark pools, like the large crypto-market, are not in the good graces of the SEC and other regulatory bodies. In a recent conversation, Gary Gensler mentioned that dark pools have become more common during the recent surge in retail investing. He also emphasized the SEC’s role in “guarding against fraud and manipulation in the market, whether from big actors and big hedge funds or not.”
Despite the fact that dark pools have been under SEC scrutiny for some time, they piqued lawmakers’ interest following the $20 billion collapse of investment firm Archegos Capital Management. However, the market does not appear to be bothered by these concerns.
According to one report, an estimated 8% of volumes were transacted through dark pools in 2019. In 2017, the value was around 5%, and in 2014, it was non-existent. This means that cryptocurrency trading has increased by more than 3% in less than a year.
As a result, it is safe to assume that at least 10% of trading currently takes place through dark pools. Despite the lack of concrete data, the emergence of dark pools and institutional investors suggests that.
Dark pools: the lesser of two evils?
Crypto dark pools have the advantage of digital verification techniques over regular dark pools. Furthermore, by eliminating the possibility of manipulation, associated protocols help to facilitate a fair market price for all participants.
Furthermore, ongoing advancements in cryptographic verification methods are expected to make dark trading safer through the use of an open-source protocol. This could ensure that similar rules apply to every buyer and seller.
Dark trading may appear to be a lesser evil in the crypto-market, a highly volatile and comparatively newer market already plagued by issues such as massive pumps and dumps and regular FUDs.
Consider Elon Musk’s May announcement that he was concerned about the environmental impact of Bitcoin mining. The entire FUD campaign drove BTC’s price down by nearly 40% in a single month.
Consider all of the distress selling that is taking place on spot exchanges. As it stands, BTC exchange inflows and outflows have a significant impact on Bitcoin’s price trajectory and, by extension, the rest of the market’s.
The main concept behind dark pools is now anonymity. To many in the market, however, it appears to defy the principles upon which blockchains are built, one of which is transparency.
It is worth noting here that blockchains are designed to be transparent while maintaining pseudonymity. This, once again, means that transactions, even if completely transparent, cannot be traced back to specific actors.
So, can dark pools help Bitcoin’s future?
The larger question now is whether a growing trend in dark pool trading, along with narrowing spreads and fewer opportunities for simple linear arbitrage, indicates a maturing crypto-market. In general, the answer to this question is YES.
Market fragmentation is consistent with blockchain core values such as decentralization, anti-fragility, and low reliance on trusted gatekeepers. Dark pools serve as niche platforms for a wide range of traders and investors. In some ways, this so-called fragmentation and diversion of trade volumes represents decentralization.
Furthermore, there is no reason to suspect dark pools for the time being, especially since they serve as an alternative design and platform in the market. Aren’t traditional markets, after all, diverse? Then, surely, diversity must be beneficial to crypto-markets as well.
As a result, there is a strong possibility that BTC’s future growth trajectory will parallel market diversity, fragmentation, and development. Furthermore, dark pool trading may contribute to the overall market’s growth by providing institutional investors with a dark/anonymous platform.
For the time being, the evolving landscape and increased dark pool activity point to the crypto-maturity. market’s Without a doubt, this is a positive sign for Bitcoin and the broader market. This may also help to advance BTC’s narrative as a traditional asset class.