Bitcoin Dark Pools

2018-07-19T07:04:02+00:00July 9th, 2018|

Bitcoin dark pools work for you if you’re one of those so-called cryptocurrency whales who has stocks and digital assets and wants lots of liquidity with stable Bitcoin prices.

The beauty of dark pools is that they’re like a private forum removed from the regular world of bitcoin trading. Buyers and sellers agree to trade at specific prices, with none of the transactions appearing on the public order books of Bitcoin exchanges.  If this were the case, movement of this size would cause ripples that would raise prices and disrupt the Bitcoin ecosystem.

As Bitcoin pioneer Jered Kenna told IBTimes UK:

“If a significant holder were to decide they wanted to liquidate their Bitcoin completely and dump it on an exchange all at once then the price could drop quite a bit. Similarly, if another individual places a massive buy order the price would likely rise.”

Such movements are called “slippage” and could  send the Bitcoin world into a panic. By removing themselves to some “shady” offshore pool, these exceptionally wealthy traders and investors could stabilize bitcoin price not only for themselves, but also for “regular” Bitcoin dealers who handle far smaller transactions.

Contrary to what some people think, Bitcoin volatility is actually far smaller than traditional investments, so all it takes is a minor swell in Bitcoin volume to cause swings. These dark pools also accomodate fiat currency, where mainstream investors can use the pools to hedge against volatility.

Dark pool users also have the advantage of keeping their transactions “underwater”, as it were. Bitcoin investors who trade on regular bitcoin exchange markets consent to their transactions being transparent, in that spectators know details of their deals. To those who want to keep their cards close to their chests, dark pools are ideal.   That being said, governments have their eyes set on regulating dark pools. Banks and financial institutions with their own dark pools have been penalized by governments for unlawful trading activities. In 2012, for instance, European regulators scrapped the planned $9.5 billion merger of NYSE Euronext with Germany’s Deutsche Börse over concerns it would create a monopoly in exchange-traded derivatives.

Still, dark pools have their attractions and account for almost 20 percent of stock trades in the US, according to SEC Commissioner Kara M. Stein in 2015. A year later, a Reuter’s Business report noted that figure was now  around 40 percent. As early as 2015, Stein predicted that Blockchain tech could revolutionize the dark pool market.

Emma Quinn, AllianceBernstein’s Head of Asia Pacific Trading for equities, told news outlet GlobalTrading “I think dark pools aid price discovery. There has to be post-trade transparency but once that happens you’ve actually got more transparency on a market than you normally would.”

MIT Professor of Finance Haoxiang Zhu agreed with that assessment writing that “Adding a dark pool alongside an exchange tends to concentrate price-relevant information into the exchange and improve price discovery.” He also said, “Improved price discovery coincides with reduced exchange liquidity.”

Bitcoin’s first dark pool, called Tradehill, came out in 2011 introduced by one of Bitcoin’s earliest entrepreneurs, Jered Kenna, but closed three years later. Kraken, a San-Francisco-based Bitcoin exchange, began trading in 2015.

Kraken stipulates that its users need to be on Tier 2 or higher, which means they require services that go beyond mere digital and fiat currency trading from Kraken, and they have to invest at least 50 Bitcoins to participate. Kraken charges an extra 0.1% for dark orders.

Over time, other cryptocurrency exchange platforms, that include LakeBTC, one of China’s largest exchanges, opened their own dark pools. Most times, users need to stock account balances with at least 50 bitcoins.

In November of  2016, TradeZero, an online broker, came out with their own system and partnered with Jered Kenna. TradeZero targets the non-US market and provides commission-free stock trading. Users have to show an opening balance of at least $10,000 or the equivalent currency.

In time, TradeZero plans to expand to Bitcoin various starting with Ether and Litecoin.

All Bitcoin dark pools guarantee 100 percent hack-proof security. Such security is nonnegotiable, given that even the slightest hack would result in investors losing millions if not billions of dollars. For instance in December, 2017, hackers stole almost $64m in Bitcoin from the Slovenian-based decentralized marketplace, NiceHash. Though not as common as it once was, Bitcoin pilfering continues. Additionally, Bitcoin transfers are not refundable nor do they carry chargeback policies. One hack and the funds of dark pool users are gone forever.

In short, dark pools work for some and not for others. For people rich in Bitcoin investments who want privacy and cryptocurrency stability, dark pools can be a blessing. Their lack of trnasparency can result in abuse.