Cryptocurrencies: how to take advantage of market trends (and inefficiencies) to keep up with industry changes
In the ’90s, John Levine , a young fintech programmer, published his «Electronic Communication Network» (ECN) «Island» .
So, nobody could have known that NASDAQ and the world’s major brokers would have followed his example, and no one, including the world’s most sophisticated financial institutions, could have foreseen its future impact.
Now, whenever you access important exchanges like Fidelity or Robinhood, orders go through something similar to what Levine has created.
A brilliant but imperfect structure
Levine unintentionally developed a purely decentralized market . His ideology drew the attention of the most hungry marketmasters and intermediaries, who quickly transformed it into something more centralized.
The new methods of profit became so interesting that everyone started asking for a piece of the cake. But even this brilliant structure proved to be imperfect and many began to wonder: what happens when both the market and the assets exchanged are decentralized? How can companies stay afloat if they can not make profits? For the first time in decades, institutional money encountered an obstacle.
Thanks to Levine’s new technology and the ever-growing user base, financial institutions could no longer rely on outdated money-making mechanisms.
All this led to the emergence of the recent zero-fare approach , which largely depends on investor awareness. More experienced market players have begun to add complex algorithms to withdraw commissions from perceived low-cost transactions.
The ideology ? Those with a better understanding of technology would have taken more profits. The lessonto learn? Instead of being vulnerable to uncertainty, it is necessary to take advantage of market inefficiencies.
“Let’s take a quick look at the market making as a whole. One of the most competitive areas is trading fees : those who offer lower or zero commissions attract most retail investors.
Many exchanges offer this model at no cost which is actually misleadingbecause the transactions are not actually free. If the primary concerns are speed and price, this “free” model is actually quite the opposite – something quite far from transparency, almost in a scandalous way. A more natural growth of the market requires better models “,
Dima Zaitsev, Head of International PR of ICOBox pointed out , adding:
“Traditionally, most profits are realized through larger spreads in exchange for reduced commissions . Free or reduced-rate trading is offered at the cost of wider spreads.
Beware of trading spreads
While theoretically retail investors dont pay fees, spreads on these exchanges are higher, with an added premium. They don’t use only this mechanism, but it illustrates the means used in the trading of cryptocurrencies that are not available in traditional markets. “
Zaitsev has developed two different models of exchange.
Model 1: wider spreads / lower commissions
Inflation on spreads is not rare, but cryptocurrencies make it easier, said the expert who continued:
“Traditionally there are your typical bid / offer pricesaccommodated by the commissions. But in the digital market, spreads are inflated by smaller cents and the prize is pocketed. “
According to Zaitsev, this has triggered a broader debate on the fact that exchanges damage the “no middleman” philosophy of the blockchain. Considering the liquidity and availability of an asset on the market, most retail investors make no differencebetween dozens of exchanges – an important point if we want to ensure the integrity of the cryptocurrency market.
” Inadequate regulatory supervision coupled with order routing further aggravates the situation.”
The lack of legal protection can make a novice of the market suspicious. Directing orders outside is simply impossible in traditional markets with their clear structure and established mechanisms.
But cryptocurrencies are something different. An exchange can direct orders through a platform of other jurisdiction, which allows inflation to spread. What is illegal in one jurisdiction could be perfectly linked to another. The profits can then be broken legally – a no-go in a zero-sum market, as this influences the odds against the retail investor.
Model 2: High Frequency Trading (HFT) Firm Partnerships
According to the expert, mastering the trading strategies of HFT companies can take years, but the important thing is that they do fast and complex trading in milliseconds, not minutes.
HFT companies hate the risk and love cryptocurrencies because they are fully digital. Everything, unlike traditional markets, is virtual: it is a model that effectively eliminates risks . Cryptocurrencies adapt perfectly to the law: they eliminate the risks in high frequency trading, bringing faster returns.
“Let’s take a look at the free Robinhood exchange . Originally its founders brought the product into companies of 75 VC which nevertheless laughed at him. Many market participants were certain that the newcomer would not survive: how can a free trading platform make a profit? “
The SEC report on the third quarter made it clear: Robinhood redirected retail investor orders to HFT companies, which immediately scalped every cent before execution. Most retail investors use Robinhood simply because it is faster and easier. HFT firms execute orders almost instantaneously before retail investors execute them.
Small players do not get the exact price, but rather combine with a market order, essentially accepting the market price. And virtually non-regulated cryptocurrency allows you to scale this model . Although in principle a genius, big players need to use this model judiciously not to revolutionize the market: some economists argue that the constant sale of cryptocurrencies for fiat currencies puts serious downward pressure on the prices.
The unexplored territory of digital markets allows for great speculation. This is the reason people call them “The Wild West”. Many use these inefficiencies to reap huge profits. But in the end, one can not help wondering if the final costs for market health could be too high.
Experts like Zaitsev and his ICOBoxteam are helping companies navigate the ever-changing world of finance and fundraising by developing market practices that take advantage of the latest trends and inefficiencies . Knowledge is power, and being able to effectively identify and exploit the latest strategies is the key to positioning any company at the forefront of progress.