February 26, 2018
A sudden jolt higher on Monday in the price of Bitcoin caught cryptocurrencies traders off guard, highlighting the lack of liquidity in the market.
Bitcoin soared from $9,638 to $10,225 in a 40-minute span that began just after midday in London, according to Reuters data tracking the Bitstamp trading venue.
Monday’s move caught the attention of people who discuss the digital currency on Reddit, the social media forum.
“What made it go up so suddenly?” asked on user. Another exclaimed: “I’ve never seen it rise so fast in a span of 15 minutes!”
“Here we go, boys and girls! Awesome way to start a new week,” said a third user.
Digital currencies traders are, of course, no strangers to intense volatility. But the velocity of Monday’s rally highlights one of the key elements of the market that concerns institutional investors.
Low liquidity, or a lack of investors who are willing to take each side of a trade, means that large buy or sell orders often move the broader market. The situation is heightened since there aren’t “dark pools”, or off-exchange venues where transactions remain private until completed, which companies can turn to when they are trying to execute large transactions.
Dark pools are popular among other assets, such as equities.
Start-ups are looking to solve both of these issues. Republic Protocol, for instance, is working to launch a dark pool. It said earlier this month that it raised 5,000 ethereum, worth $4.4m at today’s exchange rates, in an initial coin offering.
Meanwhile, Exchange Union is developing technology that would allow for cross-exchange transactions that would provide “best available global price matching”. At the moment, prices frequently vary widely across various exchanges.
This sort of price matching is already available in other markets. For example, in US equities, Regulation NMS was put in place by regulators to ensure investors get the best possible price regardless of exchange (some trade groups are asking for the rule to be revised).