Crypto Trading – The Brutal Irony Of It
Through the worlds of social media, it’s almost become a rite of passage that we, at some point in our time online will be approached by one of a veritable legion of ‘Introducers’. Along with making themselves a general nuisance to those on either platform, they falsely peddle their ‘access’ to a range of Bitcoin traders, along with espousing their ‘special offers’ from a wide range of amateur Over the Counter (OTC) trading desks.
One thing that we’ll find ultimately is that they contain far more hot air than the do contacts, and that their ‘trading desks’ ultimate strategy boils down to just calling wholesale markets and peddling their bootleg marketing strategies within the bitcoin ecosystem.
It’s one of the true, and very incredible ironies that comes from this industry, especially when we take into consideration some of the underlying objectives set out back in 2008 by Bitcoin – which is to provide as clean a shot between two peers, and, as a result – remove the middlemen – which getting rid of unnecessary friction laden costs within the financial world.
Fast forward ten years down the line, and who are we seeing as a persistent and acutely annoying body that has surprisingly grown in spite of this objective? Middlemen. It’s irony at its worst, therefore, that we see far more bitcoin trading being conducted by middlemen than from the world of traditional finance. It’s because of this that, instead of seeing trading costs decrease over time, we have seen them climb even higher, actually outstripping non-digital asset trading.
Now, before we delve further into the world and ridiculousness that has come to be known as the market structure of what we now know as the crypto trading market. It’s important to illustrate the fact that I am one of those that has their flag thoroughly flying for the future of cryptocurrencies and blockchain technology. As a result, I am fully on board with seeing cryptocurrency revolutionize the marketplace that we see, often in our peripheral vision, while Blockchain revolutionizes everything else.
One of the reasons why I think that cryptocurrencies have this potential is because of my own thinking when it comes to cryptocurrency exchanges, and how it can work to really simplify the process, supplying clients from all across the world with the same asset which can be immediately paired with any currency or commodity in the world, including against stablecoins.
It is with this kind of potential in mind that we can easily see the niche that the middlemen in the market had, steadily start to erode into an antiquated tool of the past, due to them only being able to operate wherever their geography confines them to, or wherever regulations force them to adhere to and serve.
But in order to be a true believer in this, we have to identify the fact that, for being one of the very rare products that espouse a path to eradicating these middlemen, it has fast become one of the markets in which middlemen are the most prevalent.
Hypothetically, if we had one investors that was being ‘represented’ by one of these ‘introducers,’ and that same introducer was able to ‘win’ thanks to their successful procurement of that one investor. This very same ‘winner’ then goes on to contact five OTC desks in order to do what he refers to as ‘Sourcing liquidity’ on behalf of their client.
Once they’ve made a choice on the desk, that desk goes on to contact three additional market makers, from which it can choose one to instigate the trade.
Once this market maker has been selected, it then provides its chosen client with a set price, after doing its own research on where they believe that they can trade this kind of order. The transaction is then completed with the aforementioned client, with the market maker managing to trade out their position through this exchange.
One of the major and glaring issues that come with this kind of trading model is that it’s very much like a telephone game. And, as a result, is a highly inefficient, time-consuming system. This kind of system also means that there is a commission based spread taking place across four counterparties, which makes no sense and is rife with price gouging.
What makes this whole system increasingly worse is the fact that each of these entities, from ‘introducers’ to the Over the Counter Desks and even Market Makers contacted through this whole exchange are fully aware of the existence of this kind of order. What this means is that the price agreed to by the investor needs to be agreed upon and subsequently acted upon by all parties, meaning that, often, by the time that these trades are set up, the market value has fluctuated negatively or positively, putting a great deal of the cost on the investor.
While we may resign ourselves to thinking that this option is the only one to make when looking to invest in bitcoin, it is really not the case. There are some good options out there for budding investors interested in trading in bitcoin and looking to do it with as much efficiency as possible.
The best kinds of examples that we can see include a range of larger scale wholesale markets and market makers that have since developed and implemented a high-quality framework of systems for trading across a range of exchanges along with other market makers.
Along with this, there is a range of agent desks along with smart order routing systems which have since been established to support new and existing investors. While the presence of these kinds of services does inspire a greater level of confidence for those interested in investing, placing ourselves into their shoes, however, it is genuinely challenging to find out which trading desk is really the best for the needs of the individual investor.
In order to really help streamline your search as an investor. Here are some of the following questions you need to ask when looking at a specific trading company.
First – Is It Trading Against My Current Order Flow As A Matter Of Principal? Example – Does It Take On The Opposite Side Of Trades Using Its Own Capital?
This is the first question simply because it is one of the most important ones that you need to be able to answer when it comes to the trading company that you’re looking at. It tells you straight away whether you’re looking at a company that has a proprietary trading desk or not.
Should the answer be a yes, it’s not really a good or bad kind of answer, but there are some important factors, whichever way the question is answered – One of the positives is that you are going to likely be trading with an entity that doesn’t have to pay some amount in commission to an intermediary entity.
But with this in mind, you should only look to conduct trades with them if they contact you first. The reason for this is because, while no intermediary is good, if they have a proprietary trading desk and are using their own capital, continuous trading on this desk will result in you paying more than at other platforms to spread the risk.
Alternatively, or in addition to this, you can take the alternative measure of getting in contact with multiple desks in order to really source your trade. The problem with this, however, is that you would then be leaking a great deal of information into the markets. And a good number of desks will occasionally ‘pre-hedge’ their digital assets ahead of going ahead with the initial trade.
While this can give you a better understanding as to what price cryptocurrencies are trading for, but this can result in the very expensive activity of asset ‘frontrunning,’ which can result in the price ramping up against your better judgment.
By comparison, if the desk that you researched does not take part in committing capital to trade, that is not strictly a good/bad thing either. This really depends on the kind of process and relationships that they have with their investors. If they’re operating as some kind of agent with a system of ‘natural’ counterparties that commit to these kinds of trades, or operate using a more sophisticated kind of trading platform, these can provide a great deal of value to all parties in involved.
When it comes to these ‘natural’ counterparties, though, it is wise to be initially suspicious of those that claim to be operating within the cryptocurrency market, as these often turn out to be false more frequently than true.
Second – Where Exactly Do These Firms Source Liquidity From? How Do They Source It, And What Does It Normally Charge For This? Is It A Charge Which Is Reflected As A Kind Of Commission? Or Is It Reflected In The Price Of The Investment?
One of the other important questions that you need to ask as well is where exactly your Over the Counter desk is getting its liquidity from exactly. One of the immediate red flags that you should be able to see is if this desk relies almost wholly on other OTC desks in operation – do not use it.
The logic is why would you want to use an intermediary desk in order to converse and pursue trades depending on what another trader would do when that same trader can deal with you directly? With this kind of system, you are effectively paying for a whole other desk that merely serves as a trading switchboard.
Along with this being wholly inefficient, along with time and money consuming system, it also means losing a great deal of control over the various orders you would want to pursue. Unfortunately for many of us, these desks are very commonplace and are actually the majority of OTC’s that are in operation out there in the cryptocurrency market.
Lastly – What Kind Of Electronic Trading Tools Does This Company Make Use Of? And How Does It Engage With More ‘Public’ Markets?
If you have an OTC desk that makes use of either a combination of single exchanges or of Over The Counter desk systems, this can make for an extremely suspect system.
It’s almost impossible for any trader, no matter how accomplished they are, or what kind of setup they have, to simultaneously make an acute assessment of all markets, while . also making a precise calculation of all the optimal pieces of a given order to send across to markets over the complete life of a single order.
One answer that you should be looking out for however is whether the desk has some kind of algorithmic trading system in place, one with the highest degree of connectivity possible, so as to give you the fast and accurate data.
This one is a pretty self-explanatory statement when it comes to other asset classes out there, but doesn’t hold as true for the crypto market. With the presence of such tools within the trading world in existence, it’s time for investors in the crypto world to take a far closer look at these pieces of software and begin to insist that agents make use of them as well.
In summary, it is high time that we begin to demand a far better quality of service from those crypto markets out there, rather than just settle for the current sluggish and inefficient system that we’re getting. These same markets need to spend more time caring about obtaining the best possible kind of execution. And, as a result, making them and their investors a far greater level of returns while simultaneously improving the market.
Thanks to CoinRoutes CEO for the invaluable insights and knowledge of crypto trading.