The Problem With Thin Markets is a Problem of the Current Crypto Markets, Restrictions on Crypto Trading Don’t Help
Cryptocurrency has been historically volatile. One way around that is increased volume. The more people who are using and trading, the less any one person or event can cause volatility.
Thus, while a state might think we need the threat of a ban or hearing and a bank may think we need to stop access, I argue that those things hurt, not help, and what we actually need is more adoption, more platforms and products, and thus more volume, stemming not just from investors trying to make a quick buck, but from investors and users who want to come into the space and stay there to utilize the world of decentralized digital systems.
Unfortunately in cryptocurrency we have a bit of a perfect storm working against us in those respects:
- We have a relatively new exciting technology that people don’t fully understand or know how to price. So we have a ton of demand, but we have demand at any price… thus potential capital injections from new users can end up being one-stop-pops where they come in at a high, buy, then sell later at a loss and leave the space. This leaves people burnt out on the price and put off from the tech.
- We have experienced traders and some market manipulators who got in early and have a lot of control over the space. On the same hand a lot of the equally big holders who believe in the space tend to not trade actively (for example, the Winklevoss twins).
- We have institutional investors who want to get in the mix, but don’t yet have ideal ways to fully access the market (that is in the works; for example see TT + Coinbase).
- We have a lot of people who would be interested in using and investing, but barriers to entry like the complexity of using even simpler crypto apps and getting your bank to let you deposit money in to actually buy crypto can be challenging (GBTC and BTC suffer from access issues, and meanwhile alts suffer from those issues plus crypto-to-crypto exchanges having waiting lists for new users; fixes are also in the works here, for example Square’s Cash app and Robinhood crypto trading).
- We have a propensity for the media to help blow bubbles and then revel in popping them only weeks later. For example, Nov 2017 – Feb 2018, where the media happily joined in the mania, but quickly joined in the FUD phase that followed. This puts pressure on the markets, but also creates a senses of panic in general users and investors.
- We have states and banks wary of the bubble aspect and the use-value aspect of crypto, and their resistance / approval is taken as a sign by the general public (and is used by traders as an excuse to either pump and/or dump). The manipulation in the market wasn’t the only force that popped the last bubble, let’s put it that way. Being unclear does not help.
Thus, on one hand average investors are getting pummeled or sent to the moon by entrenched market manipulators who dominate the crypto trading space (not crypto ownership, but trading), and on the other hand we have a bunch of potential users who aren’t actively trading or using crypto. Thus, we have some volume, but not the type of volume needed to have a steady market.
Just outside of our current reach we arguably have the potential volume and demand to find a steady price and see steady ebbs and flows in price over time the accord with things like the amount of transactions and cost to mine a coin, but in practice we lack the actual volume due to the factors above compounding.
Cryptocurrency’s total market cap right now is $400 billion. The NYSE has a $18.5 trillion market cap.
I’m not saying crypto has any business with a market cap like that, I’m only saying that there is enough capital and users out there to stabilize the crypto space…. but to stabilizes they have to have access and trust. Both those factors are lacking right now. Some of that problem arises from within cryptocurrency’s makeshift global community, some of that arises from outside of it.
People thought that futures contracts might stabilize the space, but so far all futures contracts did was give people an opportunity to short cryptocurrency as it retraced back to its previous values before the last boom.
On one hand you can argue that futures didn’t have time to take full effect. However, more-so I think you can argue that there was a lack of volume there and where there was volume it was focused on derivatives trading (like trading futures) and not spot trading (like trading actual Bitcoins). Further, it is trading done by those trying to make a buck, not those investing in cryptocurrency as a serious investment.
And that is the problem, you have the tech side of things, where techies were early adopters of cryptocurrency, and then you have less savory characters. Both of those are forces, but they aren’t the only two forces you want in a given market. What you want is people from all walks of life democratically voting with dollars (and Satoshis). It doesn’t do anyone much good to have crypto bubble up, mass adoption to happen at the top, and then the watch the bubble pop. It is better to have mass adoption happen around a stable price so there is lots of buy pressure if the price goes down and some sell pressure if the price goes up.
Although it may squash the days of epic ups and downs, something common with low volume stocks as well (for example, with penny stocks), more volume in the cryptocurrency space (as a result of more products, more traders, more users, and more access) it will mean less room for a handful of entities to pump or drop prices by 10 – 20% overnight.
If prices don’t swing around wildly, then new waves of adoption won’t result in a range of upset bag holders.
One could argue that crypto is a threat to states and banks… but one could also argue that tokenized economies and investment products and technologies are going to be an important aspect of the future. Crushing Napster worked, but ultimately YouTube, Spotify, and Apple filled that gap. We can’t stop criminals from using an iPhone or a market manipulator from trading Apple stock, but the volume of non-criminals in the space helps to ensure against it and we can argue that “well, despite the dangers of internet, computers, smart phones, and easy access to music; the leap forward was definitely worth it.
Banks and governments and the media may find a certain satisfaction in getting to say “I told you so.” Or, when the tides change again crypto investors (those who held through or bought during the panic at least) may find satisfaction in themselves getting to say, “oh no, it is we who told you.”
Ultimately though, the extreme volatility is not doing anyone favors.
People like going to the casino, but people also like a steady paycheck and earning interest. The more we can work toward crypto being a useful technology and the more we can move away from it being slightly taboo, the better for the many.
At this point it won’t take much more than volume… but perhaps the realization of this is exactly why we are getting the pushback?
Still, while finding sensible ways to give people access to cryptocurrency markets might result in some people making bad choices, it is ultimately I think better to have many people making a range of different choices than it is to have a few actors with a lot of resources deciding the direction of the market on a given day.
If the people are afraid of government action and they can’t move money between their crypto account and bank account, that does of course ward off the threat of crypto with one hand, but it also kneecaps the ability for a technology to grow naturally with the other.
Truly feel like Satoshi’s vision was one of peer-to-peer digital payment systems, not one of high octane casinos with lots of losers and a few winners. The casino deal is a fine stepping stone towards the future, but making sure it is a stepping stone and not a trap is going to take volume. To have volume, we need access and adoption. The crypto space may work against itself sometimes, and outside forces may work against it, but I’d argue that the sooner everyone gets over themselves and moves onto the next phase (like Square is doing) the better. We can sit around fighting about whether Napster is a good idea or not, or we can start trying to figure out how to build Spotify.
NOTE: Ultimately it might be an awkward time to get new people to enter the space or older users to re-enter. After-all, a bubble just popped and things look a little bleak. However, its arguably better to have a wave of adoption at a point like that then it is at the top. Thus one could argue its exactly the sort of time to start working toward a next less volatile and destructive phase.