The cryptocurrency market seems to be growing in popularity every day. With the astronomical rise of cryptocurrencies like Bitcoin and Ethereum, there seems to be an influx of people into the market. Many cryptocurrency exchanges cannot even afford to have their account creation feature open all the time. Such is the demand for entry into the market that trading account creation for new customers is periodically disabled. The average daily trading volume of the market is usually in trillions of dollars. The total market cap of the entire market stands at more than half a trillion dollars which is an astonishing feat considering the market is less than a decade old.
However, despite all of these large numbers, there are a number of major problems that plague the market. To use these numbers solely as an appraisal index of the state of the market would present a false narrative. There are structural and functional issues that affect the market. These problems stem from a variety of reasons such as the infant nature of the market, lack of understanding of the cryptocurrency space, and some peculiar economics of cryptocurrencies (“tokenomics”) just to name a few.
The following are some of the major problems in the cryptocurrency market.
By far the biggest issue in the cryptocurrency market is the excessive volatility. The prices of cryptocurrencies on exchange platforms rise and fall dramatically over a short period of time. When a tradable asset can drop by as much as 49 percent in less than 24 hours, then the volatility of the market is high. There are a number of reasons that contribute to the excessive volatility in the market but perhaps the biggest contributor is the activities of “whales.”
Whales are individuals that have large cryptocurrency holdings. They are able to swing the market by manipulating the price of a cryptocurrency. They do this by means of “buy and sell walls.” A buy wall is simply when a “buy position” worth a lot of money (probably running into millions of dollars) is opened on a crypto trading platform. Regular investors who trade in small amounts will notice this big buy position that has been opened and interpret it to mean an imminent price increase. Once this happens, the price of the cryptocurrency will inevitably go up.
The problem with this regularly occurring scenario is that the whales can drive up the price without actually investing in the market. The actual trades that have boosted the price of the cryptocurrency has come from the smaller traders. When the price is at a level that favors the whales, they can adjust their buy and sell walls, cash in on the price spike and once they do so, the price of the cryptocurrency falls dramatically. This process gets repeated over and over with only the whales benefitting.
The biggest reason why this sort of asset price manipulation is possible is due to the lack of position price limits/fees on many cryptocurrency trading platforms. If adequate limits or fees are put in place, it will discourage the movement of large buy and sell market positions.
Pump and Dump ICO Schemes
ICOs have emerged to become an integral part of the cryptocurrency market. Many tokens are introduced to the market via ICOs with investors buying these tokens in exchange for fiat money. Pump and dump ICO schemes continue to be a problem for the market due to the lack of regulation. During the ICO, the entrepreneurs behind the token speculate massively on the coin, driving the prices up and getting investors attracted. Once this is done, they cash out, leaving the investors with worthless coins that have little or no value.
The Activities of Cybercriminals
The cryptocurrency market has right from its inception been beset by the activities of hackers and cybercriminals. There have been a number of high-profile cryptocurrency hacks and heists that have resulted in millions of dollars being stolen. Traders and investors have lost funds and some platforms have ceased to operate. In the aftermath of these hacks, the price of particular cryptocurrencies has dropped considerably.
In a bid to counter the activities of these cybercriminals, traders and platform operators have to take a number of precautionary measures. While some of these measures are indeed helpful, they create bottlenecks that hamper the cryptocurrency trading process. This then creates a trade-off between security and efficiency. Take for instance, the need to provide adequate security for cryptocurrency held in wallet storage. Due to the activities of hackers, some traders prefer to store the bulk of their cryptocurrency holdings in offline wallets. This means that anytime they wish to trade, they have to move from offline storage to online storage before participating in the trade. This constitutes another hassle in an already convoluted trading environment.
Transactions on a blockchain are immutable and as such if funds get stolen, there is little chance of ever recovering such funds. Cryptocurrency trading platforms constantly have to improve their security framework in order to stay ahead of the hackers and thieves. Many of these upgrades also make the trading process a lot more cumbersome with all the authentication steps that need to be carried out.
Lack of Price Uniformity
Price charting is an essential part of asset/commodity trading. It is often necessary to develop price charts in order to carry out investment analysis and develop trading strategies. The problem here is the price of a cryptocurrency can vary considerably on the different exchange platforms. With such extreme price differences for the same cryptocurrency, price charting becomes a difficult endeavor. Add to this, the sheer degree of volatility in the market and the problem becomes even more exacerbated.
The cryptocurrency market is plagued with a litany of delays across almost every type of transaction. From opening a trading account to verifying your identity and being able to make deposits and withdrawals, the system seems to be quite slow. Blockchain technology ought to make transactions occur faster but it seems to take forever for transactions to be approved on the various chains.
Issues having to do with scalability have been identified by experts as being the cause of transaction delays. As the blockchains become longer, more transactions are being held up in the queue awaiting approval. The market is volatile and as such, delays can be costly. Traders end up missing out on favorable positions because the transaction didn’t get posted on time.
These are just some of the nagging issues in the cryptocurrency market that threaten to affect the quality of the trading experience. It is vital that key stakeholders in the market continue to work on efforts to combat these issues. As the market grows and evolves, it is hoped that some of these issues will become a thing of the past.