The Last Look…
Posted by Colin Lambert. Last updated: May 24, 2021
Inevitably, following the rather chaotic and dramatic pullback in crypto prices, the naysayers are having their day – I have heard from plenty of people who believe this is the beginning of the end. It’s nothing of the sort, in fact this could be a very important stage in the market’s development.
Of course, plenty of people have been wiped out by this move, but the same happens every time there is a collapse in stock markets – the first thing anyone should understand when stepping into markets is that it willgo wrong at some stage. For crypto markets, that was last week – although it has to be said the long term HODLers are still sitting pretty – if not a little upset they didn’t take advantage at $60,000.
First the bad news though. The infrastructure creaked badly and highlighted how too many platforms have been set up to ignore the laws of gravity – as long as there is a steady uptrend and everyone is making money things are good. People wanted to head to the exit and all of a sudden a group of platforms had “technical issues” with their pricing, liquidity and ability to exit positions and cash out.
The crypto industry is desperate for institutions to get involved, but alongside the ESG concerns that are prevalent in the current debate, the fear that they will not be able to efficiently exit a position will do more to keep instos away than anything else. It’s just another reason, if an institution is looking for it, to stay away. It’s bad enough that the market seems to be overly influenced by a few high-profile billionaires, one of whom is loose to say the least, but if the technology is going to fail at the worst possible time, then the risks of adopting crypto are simply too high.
Whichever way you look at it, last week was a bad look for the crypto industry, however, it needs to be stressed that not all platforms fell over – it was just some high-profile names. There are platforms out there that kept trading, maintained reasonable liquidity levels and functioned normally – and this is why it could be a positive for the crypto industry.
If the evolution of market structure becomes a survival of the fittest, that is no bad thing. Too much of the current crypto infrastructure doesn’t seem fit for purpose, if that purpose is to institutionalise the market. If the events of the past week serve to weed out the inadequate, can that be a bad thing? I would suggest a leaner, more robust trading infrastructure would do more to promote the image of crypto – the problem for too many in the industry (who, as always, are in too much of a hurry), is this will take time.
Yes, crypto markets have a propensity to jump all over a random tweet, but when have all markets ever under-reacted to news and innuendo?
Last week’s events reinforced the absolute need for a good due diligence process, something that is, thankfully, innate to institutions if not for most modern day retail punters. If due diligence enters the crypto lexicon, this will see the good venues benefit and start the process to a better market.
On a broader level, the events of last week have served to reinforce my original belief that the best use case for bitcoin is as something to trade, as opposed to the future of finance. The problem for traders is the aforementioned propensity of the market to jump all over a random tweet, but then when have markets ever under-reacted to news and innuendo?
For experienced traders in other asset classes there will be some recognisable characteristics, it’s just a question of liquidity, for the inexperienced trader, last week serves as a potentially expensive lesson in how markets operate. It will not feel good to have been wiped out, and many traders may not come back – overall though, from the dark hours may come a bright new start, and an opportunity to build a robust market structure fit for institutions.