The Bitcoin Value versus its Exchange VolumeApril 2, 2019
Bitwise recently published a report showing that about 95 percent of all transactions on the bitcoin network were fake. This means that 19 in 20 reported trading transactions is not actually taking place between real entities, but most likely bots that are designed for trading manipulation. Naturally, the reaction of the mainstream media and even a lot of the public was predictable.
For them, this was only another evidence in a long line of proof showing the bitcoin ecosystem and even the entire cryptocurrencies field as fake. This also means that it is a space that is riddled with lawlessness and overall government by the scammer mentality of its most malicious actors.
However, this also connects to another important factor coming out of this research. It is related to the activity of a dozen or so legitimate exchanges that are hosing the same legitimate five percent. Here, there are no manipulators or wash traders. Here and with additional equally important factors lies the actual bitcoin value that is not connected to its exchange volume
Bitwise is currently in the process of seeking approval from the Securities and Exchange Commission for the EFT (exchange-traded fund) that is based on bitcoin. The report was part of this presentation and it included a screenshot that, according to Bitwise, proves that bitcoin is among the tightest quoted spread among all of the financial instruments. This is also among the arguments presented by those who favor cryptocurrencies.
They believe that the process of cutting down on financial intermediaries makes blockchain both effective and cost-saving for the actual users. Thanks to this, the report by Bitwise shows that not just is bitcoin open to different types of manipulation but that is also a financial instrument carrying an incredible potential. This is something most crypto enthusiasts can agree with, along with the report notion that the only way to further improve bitcoin is to further regulate its trading mechanism.
High Efficiency and Liquidity
The small spread of price is a very important factor that bitcoin has going for it. For example, the US Treasurys Market daily turnover is considered as one of the most price-efficient markets in the world. Here, the range is between about $500 billion and $1 trillion. Bitwise estimates that the daily trading turnover on the worldwide level is about $270 million.
Additionally, bitcoin exchanges are usually open to retail investors while Treasurys are traded almost entirely by investors who are moving exceedingly large amounts of money. In regularly and traditional financial markets, size mostly dictates liquidity This in turn usually dictated the price efficiency. However, the data points towards the option of bitcoin being much more efficient in spite of its lower scales of trade. The same efficiency is gained because bitcoin almost completely eliminates any trusted intermediaries that have their own fees.
These usually carry out a range of settlement processing and back-office execution that take place inside of the legacy financial system. The Bitwise report showcases that in the standard financial environment, traders have to pay these trustworthy entities to do the front-end operations part and find sellers and buyers. Additionally, the report shows that the 10 real exchanges are willing to put their operations under the scrutiny of the financial regulators.
They are also the ones who earned and continue to earn the trust of the users. This is the reason why all those procedures like know-your-customer actually present something bitcoin should work towards. They provide a stable framework where the other back-office procedures can occur in safety and in a generally trustworthy environment.
The Decentralized Exchanges
Some might argue that the advantage of regulated exchanges will disappear when decentralized options hit the market. With them, the traders will be able to retain the complete custody of their tokens and exchanges will do nothing more than the process of price matching. This definitely will protect investors from a range of abuses and issues like the recent loss of $190 million that took place on QuadrigaCX.
However, it will not solve the lack of the biggest functionality of an exchange – price discovery. Currently, and possibly for good, there is no way around the idea that centralized platforms, like for example Coinbase Pro, present to the discovery process.
However, if the exchange is not covered by regulators that stop it from manipulating prices, no investor or trader can know for sure that it is not acting against them. In those cases, like in many digital ventures lacking regulation, which are for example certain esports leagues, the idea of a fair environment is based on wishful thinking. This could hear mean that the issue of price discovery is an illusion.
In the same context, the idea that the key selling point of platforms like Bakkt, which are yet to be launched, is the idea of providing bitcoin price discovery that is federally regulated in the US. With the full force of a backstop option wielded by federal oversight, the large institution will be assured that they are getting reliable prices. This would allow them to remain trustworthy when it comes to the duty they have to their customers.
Coinbase, like other major exchanges that are currently competing with Bakkt, are likely to disagree with this idea. In their argument, that the regulatory framework developed on the basis of the money transmission license of individual states sufficiently covers their users. Still, the Bitwise report is not the hard hit to the bitcoin network when it comes to the public. Instead, it is a hit for the scamming exchanges that have been outed with this report. It also showcases that those who are on the fence about the usefulness of bitcoin that there is plenty to be gained from it, while the bitcoin believers are once more remind about the necessity of regulatory oversight.
The same oversight can be debated and its limits further defined step by step, but its presence is essential. Otherwise, the legitimacy of the price discovery will continue to hang over the entire field of cryptocurrency, not just bitcoin.