Crypto’s wild ride raises new liquidity concerns

The first weekend in December was not fun for cryptocurrency investors. As Friday night gave way to Saturday morning on Wall Street, the prices of major tokens plunged, with bitcoin losing about a fifth of its value.

Who exactly was selling remains a mystery, but a tantalizing clue has been dropped by one of the most connected people in the digital asset world: Brian Brooks. One of the main banking regulators under Donald Trump, he served as legal director of one crypto exchange, Coinbase, and briefly CEO of another, Binance US, and now heads bitcoin miner Bitfury.

Appearing at an audience from the House of Representatives Financial Services Committee on Wednesday, Brooks raised the possibility that the crypto rout may have involved as little as one or two big players trying to offload large leveraged positions in a 24-hour market. 24/7 which stays open when most people are trying to get some sleep.

He offered the suggestion when asked by Al Green, a Democrat from Texas, if he thought the recent episodes of “extreme volatility” in the crypto markets were a sign that something was wrong and that investors. were inflating a bubble like the one that preceded the financial crisis. crisis.

Brooks, who served as interim currency controller in the Trump administration, attributed the recent dramatic price swings to the “early stage” of market development. Liquidity is so limited – he estimated that around 80% of bitcoin holders have never sold – that when a big crypto investor sneezes, everyone catches a cold.

“One person who unwinds their position can have a huge effect on the price,” Brooks said. “So when you hear about a day when there was a giant bitcoin price drop, it often turns out that there were one or two big traders that were unwinding a leveraged position and the the vast majority of owners have enough confidence in it that they have literally never sold a unit.

Bitcoin bulls like Brooks have their reasons for viewing a sharp drop in price as a positive indicator. Crypto tokens have fallen sharply previously, only to resume their seemingly relentless ascent.

But his analysis also helps explain why so many current regulators – notably Gary Gensler, President Joe Biden’s choice to chair the Securities and Exchange Commission – remain so wary of the crypto markets.

While a small number of investors can easily move a market – suppose, in this case, for fundamental reasons – an equally small number can likely move it.

More relaxed regulations in countries outside of the United States only increase the risk: Price volatility in the crypto spot market can be quickly amplified by risky derivative positions formed abroad.

“People are taking extremely powerful positions because non-U.S. Platforms allow it,” Coinbase policy director Faryar Shirzad told my colleague Adam Samson this week at FT Global Meeting Room conference. “So when you have movements, you find them accelerated. “

In one month of August word At the Aspen Security Forum, Gensler hinted that an industry insider coterie could take advantage of other crypto investors. “The people who buy these tokens anticipate profit, and there is a small group of entrepreneurs and technologists standing and nurturing the projects” without sufficient disclosure or oversight, he said. “This leaves prices open to manipulation. It makes investors vulnerable.

Three months later, the SEC rejected U.S. fund manager VanEck’s request for a bitcoin-backed exchange-traded fund. Explaining her decision, the committee noted its past concerns that “those in a dominant position in bitcoin” could manipulate its price and thereby put public investors at a disadvantage.

The result is a catch-22 for industry cronies like Brooks. To improve the liquidity of crypto markets and reduce their sensitivity to price fluctuations, they would like regulators to approve trading vehicles like the one offered by VanEck.

Despite all of its libertarian impulses, the digital asset industry needs greater regulatory acceptance to help make institutional investors and businesses more comfortable dipping their toes in crypto waters.

“If we had a clear regulatory framework in place, I wouldn’t be surprised if we had wider acceptance,” said Marion Laboure, analyst at Deutsche Bank. “If we had wider acceptance, we would have more cash. If we had more liquidity, we would have lower volatility. “

Wild weekends like the previous one will only make it harder for officials in Washington to feel comfortable with the crypto markets. No regulator wants to wake up on a Saturday morning and find that a bitcoin whale may just have cost public investors dearly.

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