This article was originally published for Blockchain Live London 2019.
The so-called ‘crypto winter’ of last year is a distant memory and with new confidence in the market, ever-increasing volumes, and a more diversified investor base, crypto markets are buzzing. For digital asset exchanges, this is all good for business.
But now is not the time to celebrate just yet. As an early adopter of Bitcoin, I know most crypto enthusiasts will agree when I say that we haven’t even begun to scratch at the surface of unlocking the full potential of this new asset class.
If we want to reach that next level though, I believe it’s vital that we foster dialogue between decentralized communities and the regulated investment community, and develop an environment where investors are free to make their own choices about their preferred risk profile, but within a safe and trusted framework.
It’s not just that such an environment has the potential to drive larger mainstream players – and thus, serious capital – to enter the crypto market. It’s also important to consider that if the market is left unfettered to the extent it is now, we’re leaving the gates wide open to market manipulation and other unscrupulous practices that inevitably hit hardest on the smaller investor – the consequences of which may be to stunt or even stall the growth of this nascent market.
The need for common ground
This is not to say that centralization is the panacea.
We’re all too familiar with the risks posed by overly centralized models of operation: it can lead to situations where excess, corruption and backroom handshakes go unchecked. Some might say, this is what inspired the creation of Bitcoin.
Favoring the individual, Bitcoin was built as a means to exchange value on a peer-to-peer basis without the need for any intermediaries but the protocol that governs it. But since Satoshi’s creation, we’ve come to a highly diversified market – an archipelago of blockchains if you may – and, as of yet, there is no standard and widely adopted means of exchanging value across protocols.
A recent interview with a 22-year old programmer, explaining the mechanisms behind inflated trading volumes and false price signals, shows just how easy it is to take advantage of an unregulated and disorderly market. It’s interesting to note that when asked what his view was on the crypto market, he reportedly said he was bearish, adding that the believers in crypto are ultimately the ones who suffer.
The point is that even in and around decentralized systems, there is still the potential for disproportionate influence. This can come in the form of questionable trading schemes, such as the one mentioned, but also ‘whales’, whose activities in the market can severely impact price movements, or a concentration risk in mining pools, which can pose a significant threat to proof of work-based blockchain systems such as Bitcoin.
Even if algorithms were developed to perfectly solve the problem of power internally, when it comes to price discovery and cross-protocol exchange practices, it’s vital that we come to a set of agreements to safeguard market integrity.
I believe we’ve arrived at a critical juncture. If left to its own devices, the crypto market is at risk of reaching a plateau where malpractice and speculation could destroy investment prospects. But it’s also a time of opportunity.
As it stands now, following a decade of near unbridled freedom, the contours of a regulatory framework are coming into focus. We have a chance here to really engage the investment community and apply some of the lessons learned in existing financial markets around orderliness and codes of conduct.
This would help boost investor confidence among crypto enthusiasts. Moreover, once an environment of mitigated risk and regulated trading practices is established, the stage is set for the far deeper and far greater capital flows that hedge funds, family offices, pension funds, and other institutional investors can bring into the crypto market. Reciprocally, it provides the framework to expose institutional investors to crypto as an uncorrelated asset class and a new avenue to spread risk and grow wealth.
About the author
Michael Wong is the Chief Commercial Officer at AAX.