Since its climax on December 17th, 2017 - when Bitcoin reached its all time high, nearly $20,000 - people have been wondering when the price of Bitcoin and other cryptocurrencies will recover.
There have also been a lot of speculation as to what is actually going on and what has caused the ups and downs in the market. In this article, we will shed some light on the matter and explain why the price of Bitcoin and other cryptocurrencies is a dark joke being played on people globally.
The first thing we must consider is how the price of cryptocurrencies is calculated. The most logical answer would be that the price is calculated based on the exchanges or the markets that offers cryptocurrencies calculated by the buy/sell orders. Websites such as Coinmarketcap offer insight on the available exchanges, price and volume of trade.
But when we consider something like cryptocurrencies which can be bought and sold without the need of an exchange - or any other form of intermediary - we can conclude that there is something missing in the story. Such missing elements do not solely affect cryptocurrencies, but also include commodities (gold and silver) as well as financial instruments (stocks).
The second aspect we must consider is ‘over the counter’ (better known as OTC) sales of cryptocurrencies. Imagine this if you will: You are a person looking to purchase millions of dollars worth of cryptocurrencies. Are you going to sit there on an exchange, register, load your account from a bank account, then buy up large amounts of digital currencies or tokens - essentially driving the price up while putting yourself at a disadvantage? Would you if placed in that situation have the patience and time to sit there buying large amounts of digital currencies or trust someone else to do it for you?
With that thought in mind, what if I told you that instead of doing it that way you could instead meet with someone and trade with without the transaction being reflected in the market. You would perhaps even be offered the trade at a discount due to purchasing a large amount. So without much work you could obtain your digital currency or tokens and even be able to manipulate the market by doing so.
If we consider this and take the time to truly understand its implications, we would conclude that the current prices - whether it is gold, silver or digital currencies - can all be manipulated in this way. This has also been a concern for the traditional stock market as mentioned by an article published on Reuters:
“Those whose trade never makes it to an exchange can benefit as the broker avoids paying an exchange trading fee, taking cost out of the process. Investors with large orders can also more easily disguise what they are doing, reducing the danger that others will hear what they are doing and take advantage of them."
But the rise of “off-exchange trading” is terrible for the broader market because it reduces price transparency a lot, critics of the system say. The problem is these venues price their transactions off of the published prices on the exchanges - and if those prices lack integrity then “dark pool” pricing will itself be skewed.” - Dark markets may be more harmful than high-frequency trading, Reuters 2014.
If this has been occuring with the multi-trillion dollar stock market, why would cryptocurrencies - which are much easier to send to another person in P2P mode - be exempt from such manipulation?
The next question is whether this is actually large enough to affect the integrity of the market price. There is currently no data on the number of OTC trades that take place in the cryptosphere, though we can use the data provided by the much larger stock market as a point of reference:
“Around 40 percent of all U.S. stock trades, including almost all orders from “mom and pop” investors, now happen “off exchange,” up from around 16 percent six years ago.”
The best way to explain this would be to compare this to your tax return. If you as a business had transactions that took place off the book, in cash, how can your accountant or the tax office ever know the exact amount of your sales or the businesses true turnover? On the other hand, would you be able to claim expenses which were done in the form of cash payments, with no receipts?
So then how do we know the true value of anything affected by OTC sales? To put it simply, we cannot accurately determine the price once trades are finalised in this manner.
All you can do is work out how something is growing, and how much money is being invested in its adoption and expansion. If you still believe it is heading towards a positive path, you can then decide whether what the market has to offer is worth it. Chances are, many people are buying or selling cryptocurrencies and tokens without leaving a trace on the market.
In a follow up article - soon to be released - we will discuss how the lack of transparency within our financial systems is something that cryptocurrencies are pushing to resolve. We will also discuss the difference between price and value and how it relates to the stock market, commodities, and cryptocurrencies.
Image from Pexels.
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Amin has been working closely with the developers of some of the most hyped-about projects in the cryptosphere since 2013. A regular speaker at various locations throughout Europe and Australia (including the EU Commission in Brussels, UNESCO house in Paris, and the Ministry of Economics of The Netherlands) Amin has been helping share the truth, freedom, and choice that Bitcoin and its partner platforms have to offer. An advocate of P2P and decentralization in an otherwise centralized world.