Crypto’s wild ride raises new liquidity concerns

The first weekend of December was not fun for crypto investors. As Friday night gave way to Saturday morning on Wall Street, the prices of major tokens plummeted, and Bitcoin lost around a fifth of its value.

Exactly who was selling remains a mystery, but one of the most connected people in the world of digital assets has dropped a tantalizing clue: Brian Brooks. A major banking regulator under Donald Trump, he has served as legal director of one crypto exchange, Coinbase, and briefly as chief executive of another, Binance US, and now heads bitcoin miner Bitfury.

Appearing at a House Financial Services Committee hearing on Wednesday, Brooks raised the possibility that the crypto defeat could have involved just one or two big players attempting to offload large leveraged positions in a 24/7 market. It stays open when most people are trying to get some sleep.

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

Brooks, who served as the Trump administration’s interim currency controller, attributed the recent dramatic price movements to the “early stage” of market development. Liquidity is so limited, he estimated that around 80 percent of bitcoin holders have never sold, that when a large cryptocurrency investor sneezes, they all catch a cold.

“One person dumping their position can have a massive effect on the price,” Brooks testified. “So when you hear about a day where there was a giant price drop in bitcoin, it often turns out that there were one or two large traders that were undoing a leveraged position and the vast majority of holders have enough confidence in it as for I literally never sold a unit. “

Bitcoin bulls like Brooks have their reasons for seeing a big drop in prices as a positive indicator. Crypto tokens have fallen dramatically before, only to resume their seemingly relentless rise.

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

If a small number of investors can easily move a market, suppose, in this case, for fundamental reasons, that an equally small number can manipulate it.

Looser regulations in countries outside of the US only increase the risks: price volatility in the cryptocurrency spot market can be rapidly amplified by risky derivative positions accumulated abroad.

“People take extremely leveraged positions because non-US platforms allow it,” Faryar Shirzad, Coinbase’s chief policy officer, told my colleague Adam Samson this week at the FT Global Boardroom conference. “So when you have movements, you find them accelerated.”

In an August speech at the Aspen Security Forum, Gensler hinted at the possibility that a circle of industry insiders could take advantage of other crypto investors. “The people who buy these tokens are anticipating profits, and there is a small group of entrepreneurs and technologists standing up and nurturing the projects” without sufficient disclosure or oversight, he said. “This leaves prices open to manipulation. This leaves investors vulnerable. “

Three months later, the SEC rejected US fund manager VanEck’s request for an exchange-traded fund backed by bitcoin. In explaining its decision, the commission noted its past concerns that “people with a dominant position in bitcoin” could manipulate its price and therefore put public investors at a disadvantage.

The result is a trap for industry acolytes like Brooks. To improve liquidity in the crypto markets and reduce their susceptibility to price swings, they would like regulators to approve commercial vehicles like the one proposed by VanEck.

For all its libertarian urges, the digital asset industry needs greater regulatory acceptance to help institutional investors and corporations feel more comfortable dipping their feet into crypto waters.

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

Wild weekends like the past will only make it difficult for Washington officials to get comfortable with crypto markets. No regulator wants to wake up on a Saturday morning to find that some bitcoin whale could have cost public investors a lot of money.

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