The more information an investor has, the more it drives volatility in cryptocurrency prices. Therefore, coinbase’s regular disclosure of tokens that will be listed on its trading platform is a remarkable plan.
Coinbase’s plans, announced in an April 11 post about 50 cryptocurrency projects “under consideration” by Q2 2022, could help assuage doubts surrounding low-cap tokens. At the same time, this also helps to allay the industry’s concerns about “information imbalances”.
This is a phenomenon that occurs when one party in the transaction – such as the seller – has more information, more knowledge than the other – the buyer in this case.
The list announced early last week includes 45 ERC-20 tokens on the Ethereum blockchain network and four SPL tokens on the Solana network. The largest U.S. cryptocurrency exchange explained that the list aims to “enhance transparency by providing as much balanced information as possible.”
Does this make cryptocurrency investors more equal to each other? “Transparency will of course always be welcome,” said Daniele Bianchi, an assistant professor of finance at the Queen Mary School of Economics and Finance, University Of London, who has just published research on cryptocurrency price volatility.
However, “the imbalance in information and adverse choices remain rampant in the cryptocurrency market,” and this is unlikely to change any time soon.
Indeed, just a day after the announcement of Coinbase‘s listing, a wallet address, possibly an insider, there was probably pre-existing information about Coinbase’s listing and made a huge profit with these tokens.
Institutional investors cause cryptocurrency price imbalances
The imbalance in information is a major problem in the cryptocurrency sector. Bianchi said this was caused by a relatively low market capitalization, centralized ownership structure and a highly fragmented and multi-market market structure. Furthermore, he said it’s not just “whales” and cryptocurrency miners who can manipulate the market:
“The investment sector is changing and there are more institutional investors – whether specialized or multi-asset – emerging in the market. In other words, there is a kind of big mogul in the sector that can benefit retail investors.”
The low level of liquidity of cryptocurrency projects makes them vulnerable to price manipulation, Bianchi added. “Liquidity is of the essence. Besides the top 100 by market capitalization, a transaction of hundreds of millions of dollars can easily create significant price fluctuations, putting retail traders with poor timing skills at a disadvantage.”
Others agree with this view. Raj Kapoor, founder of the Indian Blockchain Alliance, said that “The cryptocurrency market is essentially a perfect environment for information imbalances.” “It’s not completely transparent and is part of a fragmented system.”
“There will always be people who have information earlier and can always act first,” said Lennart Ante, co-founder of the gGmbH Blockchain Research Laboratory and author of research on information imbalances in Bitcoin (BTC) transactions. This can come about when there are listings, changes in regulations, or even just Twitter posts by influencers like Elon Musk.
“One of the biggest imbalances is that anonymous developers know their own identity and purpose, but buyers don’t,” said Douglas Horn, Director of Software Development for Telos, a blockchain platform.
“Another type is market manipulation by whales, who know that their lucrative selling walls can force prices so they buy more coins without any investment, but the majority of investors can’t do so. Both of these situations cause major fluctuations in market value,” Horn said.
Related: What Are The Differences Between Investment And Speculation?
Is Coinbase leveling the field?
Can Coinbase’s announcement of 50 cryptocurrency projects likely to be included in the Q2 2022 list on the exchange improve transparency?
This is “a step in the right direction,” said Emiliano Pagnotta, an assistant lecturer in the department of finance at the Singapore University of Management. This will help level the imbalance in information.
Until now, investors have often opened trading accounts “just to gain access to tokens that have not been listed on their main exchange,” he said. This is extremely complex, time-consuming and inefficient.
Bianchi, however, said, “For the public, this won’t make much of a difference.” When a coin is on Coinbase’s pre-announcement list, algorithmic traders or market founders can still “stay ahead of retail investors and make a profit without having to wait for the Coinbase effect.” Naturally, more transparency in the listing process is necessary, “but it doesn’t help solve the problem.”
As for the case of an object, possibly an employee, who made the transaction before The 4/11 post, Horn said there was almost nothing that could be done about such actions.
“Listings of large companies like Coinbase have always been great opportunities for insiders to trade because anonymous trading is easily accessible – making it impossible to control.” This is not an ideal situation, but it is not easy to prevent it, so “there is no need to be angry in this case”.
Coinbase can still punish or fire any employee who was found to be trading before the listing was published,” Pagnotta said. The company can also limit what assets employees can invest in or other forms of such.
We need more use and trading
After all, it is difficult to eliminate the information imbalance in the cryptocurrency sector quickly without losing the decentralized nature of this market. More transparency like Coinbase did last week is helpful but this also doesn’t help improve the situation.
But the distant future could be more positive “with more professional investors entering the market and lawmakers watching more closely,” Bianchi said.
“We need more users, less centralized ownership and greater volume of transactions to improve price detection and overall market quality.”