Categories: Bitcoin Business

As Coordinated Sell-Offs Strike Altcoins, How Do Exchanges Respond?

Click here to view original web page at cointelegraph.com

Cryptocurrency liquidity has long been a thorny issue for enthusiasts and evangelists. Although they eagerly promote the ecosystem and tout blockchain’s benefits, the elephant in the room that most enthusiasts willingly ignore is the challenging liquidity conditions that impact cryptocurrency markets’ orderly flow.

The enormous volatility witnessed across the cryptosphere has been a staple of the industry since Bitcoin trading began. Intraday moves exceeding 10% are not uncommon or unheard of, and even steeper inclines and declines have dotted the trading landscape fairly regularly over the years.

Still, the market itself has been slow to address the root cause, instead blaming the activities of malicious actors, whales or technical mistakes for sudden swings and substantial mispricings that regularly arise between exchanges.

Following a coordinated XRP selloff on the recently launched Beaxy Exchange, crypto advocates must once again come to the defense of an industry that has inadequately addressed security, manipulative behavior, and most importantly, poor liquidity. As the defense of its actions demonstrate, Beaxy Exchange eagerly blamed an exploit for its own mistaken implementation of the XRP parameters for transaction payment.

However, these mistakes are entirely preventable. For the ecosystem to attract capital and enjoy its advantages over traditional financial markets, accountability for liquidity, security and transparency must materialize.

Addressing the imbalances

Far from Satoshi Nakamoto’s vision of a decentralized environment for transferring data, centralized cryptocurrency exchanges have been controversial, to say the least. On one hand, they provide one of the simplest of on-ramps for joining the nascent industry and marketplace. But on the other, these on-ramps regularly expose users to numerous risks — including fraud, theft or lack of investor protections.

While the pace of global regulation is assuredly accelerating, it has not emerged as a stabilizing force for the cryptocurrency marketplace. Regardless, regulation is just one aspect of the imbalances cryptocurrencies face when compared to more established, traditional marketplaces like equity markets.

Unlike the Wild West mentality that pervades global cryptocurrency exchanges, stocks traded on United States exchanges have built-in safeguards designed to protect investors from irregular market behavior and to limit volatility. Apart from issuing trading halts for specific securities if they decline by more than a certain percentage within a defined period, there are market-wide halts — known as circuit breakers — if major benchmarks also experience sharp declines. This is but one measure designed to control overall market volatility, and others were designed to deliver similar benefits.

For instance, the “specialists” operating in the trading pits of the New York Stock Exchange act as market makers to add liquidity while maintaining an orderly flow of prices and trade execution. The reality for cryptocurrency markets is much different. Building advanced liquidity strategies is difficult in such a fragmented marketplace, wherein each exchange likely acts as its own principal market maker for a variety of different listed assets.

Without specialists in place or the advent of multiple liquidity providers to ensure exchange stability and organized processing of orders — especially during periods of high volatility — sharp increases in order flow can cause serious service outages that are reflected in price volatility and flash crashes. Nevertheless, poor liquidity is just one of the conditions needed to spark a sell-off that can crash the altcoin market.

Banishing bad behavior

Coordinated sell-offs like the one that transpired at Beaxy Exchange can simply be the outcome of the absence of proper protections. While some exchanges are fighting back against these types of situations by implementing better Know Your Customer practices and technologies designed to identify aberrant behavior akin to the Smarts Trade Surveillance system, they are more the exception than the rule.

Manipulative trade behaviors — such as wash trading, spoofing, and pump-and-dumps — continue to proliferate largely unabated. The efforts undertaken by many exchanges to inflate trading volumes to raise their CoinMarketCap ranking remains a problem of epidemic proportions.

Related: Cryptocurrency Mixers and Why Governments May Want to Shut Them Down

These exploitative strategies do have very real consequences for altcoin traders that find themselves on the wrong side of the price action. Combining blatant manipulation with a low-liquidity environment creates the ideal conditions needed for high volatility and significant price crashes. What it will take to remedy the situation is an industry-wide effort aimed at course-correcting the on-ramp that allow these types of behaviors to flourish. OKex’s head of operations, Andy Cheug, spoke to Cointelegraph, revealing how his exchange combats such malicious activity:

“In both the traditional finance and crypto industries, the market is not immune the aberrant trading including wash trading, spoofing, coordinated selloffs, and it is a challenge that industrious people are continuously tackling. We deter these kinds of abrasive behaviors via different measures, namely our internal 24/7 trading surveillance system which is capable of identifying abnormal behaviors and consequently alerting our risk and compliance departments.”

Nevertheless, while some industry insiders pin the onus on internal controls designed to prevent these types of manipulations, others view the solution as a regulatory prerogative. However, in light of a lack of a transnational framework for addressing this challenge, the likelihood of regulation addressing coordinated sell-offs in the near term remains a distant hope. Branson Lee, the CEO of the Ecxx exchange, noted on the matter:

“Crypto exchanges are not regulated like typical security exchanges and this exposes market participants to all types of manipulation. We believe there should be rule books and exchanges should work hand in hand with regulators to be fully compliant. Currently, a lot of exchanges are benefiting from regulatory arbitrage, partly because regulations are just starting to catch up with blockchain.“

The path toward restoring credibility

While certain industry participants are increasingly moving in the direction of enhanced security and improved liquidity, much remains to be done to reinvigorate trust among altcoin traders. The conditions for sharp sell-offs in altcoins across less thorough exchanges remain omnipresent, and even their larger, most established peers face similar threats.

Although lauded for its capacity for decentralization, if cryptocurrency continues to open its doors to the uninitiated via centralized exchanges, more accountability must be a part of any industry-wide fix. This ultimately comes down to regulators forging a comprehensive approach to security, liquidity and trade surveillance, all for the benefit of real credibility that crypto users can actually count on to protect their interests.

cinerama

Illuminati, Mason, Anonymous I'll never tell. I can tell you this, global power is shifting and those who have the new intelligence are working to acquire this new force. You matter naught except to yourself, therefore prepare for the least expected and make your place in the new world order.

Disqus Comments Loading...
Share
Published by
cinerama

Recent Posts

Everyone’s Worst Fears About EOS Are Proving True

The Takeaway: EOS is the world’s seventh-largest blockchain by market cap, with a value topping $3 billion since February 2019.… Read More

3 hours ago

Street Artist Makes $12,000 in Bitcoin Donations

A French street artist best known for painting lady liberty leading the yellow vests has stated he has received more… Read More

4 hours ago

Wave Financial Launches World-First Bitcoin Yield Fund: Wave BTC Income & Growth Digital Fund

LOS ANGELES, Sept. 19, 2019 /PRNewswire/ -- Wave Financial LLC (Wave), a leading asset management firm focused on digital assets,… Read More

4 hours ago

Nigerian man returns bitcoins worth $80,000

Keith Mali Chung returned Bitcoins worth $80,000 mistakenly transferred to him. A Nigerian man who found $80,000 dollar's worth of… Read More

4 hours ago

Bitcoin Surrenders Post Fed Rate Cut; Pullback Awaited

Bitcoin slipped below $10,000 on Thursday after the Federal Reserve cut benchmark lending rates by 25 basis points.The BTC/USD instrument… Read More

4 hours ago

Bitcoin Hashrate Hits All-time High as Price Dwindles

The benchmark metric of miners confidence in the Bitcoin network established its all-time high on Thursday.Hashrate, which reflects the processing… Read More

4 hours ago

This website uses cookies. We use these cookies to collect data about your interaction with our website for the purpose of continuously improving your experience with our site. For more information we encourage you to read our privacy policy.

Read More