By Don Guo, CEO of Broctagon Fintech Group
The cryptocurrency market remains bullish. Large financial institutions ranging from JP Morgan to PayPal are now entering the market with enthusiasm. Although Bitcoin is still by far the market leader, demand for cryptocurrencies is filtering to smaller coins too with Ethereum reaching new highs and Dogecoin going astronomical, with growth of more than 1,000 per cent this year.
But for altcoins to truly take off more holistically, the market must address the chronic lack of liquidity. The infrastructure that underpins trading can be improved if exchanges introduce technology often used in other asset classes that can match buyer to seller as efficiently as possible. By introducing this sophisticated liquidity provision technology, altcoins of all different values can become a much more attractive asset to trade.
The conditions for cryptocurrencies have never been stronger. Both structural factors and the traditional market uncertainty from the global pandemic have opened doors for Bitcoin to reach new highs. A perfect storm has emerged to crypto’s benefit; interest rates are low, extensive stimulus measures will drive inflation, and commercial and investment institutions have endorsed cryptos more than ever. All these themes are also likely to continue for years to come, suggesting the crypto market growth will sustain for the foreseeable future.
The fundamental goal of cryptocurrencies is to create a fairer, peer-to-peer currency system, free from external influence. People are increasingly recognizing this and, as the industry continues to grow, we’re seeing the emergence of sophisticated infrastructure to ensure efficient trading and liquidity for participants.
With market sentiment so bullish, leading altcoins like Ethereum have shot up to a new record of $4,000 over the past few weeks. It’s unsurprising that price moves in the larger currencies directly impact the price trends in the smaller coins. Investors are increasingly drawn to altcoins as an investment opportunity and evidence suggests that some traders are channelling Bitcoin profits into altcoins.
All the big altcoins started small at some point so people look at the price of other coins and think they might be able to strike gold by unearthing a future big altcoin early. After all, the price of BTC peaked at $0.39 USD in 2010, so those that invested then are laughing now. Stories of altcoin millionaires are starting to emerge, with one Goldman Sachs managing director retiring after winning big. Adding to this, Bitcoin is limited, and as demand outweighs supply, the market will explore the next best thing will therefore require capabilities that offers traders the best prices, all the time.
The main altcoins may be the primary beneficiaries of this for now, investors will explore other coins as they integrate cryptos into their portfolios. It will become more commonplace to branch out from Bitcoin as these investors see new profit opportunities in altcoin scalability and as they become more familiar with the asset class. There are thousands of coins to choose from – virtually every exchange has a specific coin, which serves as a backbone for that exchange and the community that uses it.
Currently, most of these coins are extremely illiquid. Despite having liquidity problems of its own, Bitcoin is the most liquid cryptocurrency by some margin. Similar to traditional stock exchanges, most cryptocurrency exchanges use an order book, meaning they match orders from buyer to seller. The pairing of low trading volume and high volatility therefore often create huge price disparities in altcoins with large variations from exchange to exchange. The high slippage and large spreads mean conditions are undesirable for trading.
This is particularly problematic for the institutional investors. In executing large trades, the slippage and efficiency costs begin to add up to large sums. Major investors are therefore cautious about trading these assets because the potential losses from inefficient trading are too much to ignore. Sufficient liquidity on both entry and exit encourages broader market participation. And without more participation in these assets, the prices of native tokens will remain low which reduces chances of growth, both of the crypto exchange and the industry as a whole.
There’s no question that the crypto industry infrastructure is much more advanced than the previous bull run in 2017. But in order for trading to expand into more currencies, it must address these underlying issues and focus on liquidity provision imminently. We must enable exchanges to evolve to the next phase of maturity though liquidity pool and liquidity aggregation technology. By solving this, we can overcome a problem that has shadowed cryptocurrencies since Bitcoin was invented.