Comparing Crypto and Equities Markets
Large purchases on the stock market, often initiated by a fund or high net worth individual, have the potential to move the market. In other words, such a purchase could increase the demand for shares to such an extent that the share price rises in response.
There are myriad risks to this type of event, both for the parties directly involved in the transaction and for the overall stability of the market. Front-running is one such risk — an illegal move in most cases where a party with knowledge of a future trade will position itself to profit from the imminent price action.
Different strategies are used by investors to avoid the risks inherent to a large trade. A standard approach is simply breaking up the trade into smaller transactions over time among multiple brokers. Another is using “dark pools” which allow investors to place orders and make trades on a closed exchange to avoid broadcasting their intentions on public markets.
From Equities Markets to Crypto Markets
Large crypto purchases have many of the same risks and considerations as large equities purchases, so many of the same mitigation strategies used by stock market investors have the potential to work for crypto investors.
Our recent article about off-chain transactions explained that crypto investors with substantial holdings can simply execute a private crypto sale off the blockchain so that the transaction is not publicly known.
Large on-chain transactions are immediately apparent on the blockchain and are therefore very obvious to other investors. There are Twitter bot accounts devoted to tracking and announcing such transactions:
Defy Trends tracks the public reaction to such announcements by using sentiment analysis of social media data. Such large transactions may generate interest in crypto causing a rise in demand and subsequently the price. Influential whales can leverage their social media presence to further bolster their investment.
Moving Markets Like Musk
The most prominent example is Elon Musk, who tweeted that Tesla was buying $1.5 billion in Bitcoin in February 2021 and would accept payment in BTC. Shortly after this announcement, the price of BTC went to an all-time high. A few months later, Musk decried the environmental impact of Bitcoin mining and revoked BTC payments for Tesla cars. This triggered a major price correction and prompted accusations of market manipulation.
But it’s not just interest and sentiment that move crypto markets. Just as with equities, a large enough crypto transaction that occurs on a spot market through an exchange will put pressure on the supply and raise the price. In October 2021, an unidentified group bought nearly $1.6 billion worth of BTC within a few minutes on an exchange. This was notable as large crypto purchases are usually executed in over-the-counter markets — some analysts theorized that this purchase was purposely done on an exchange to drive up the price.
Key Differences Between Crypto and Equities Markets
The comparison between large crypto transactions and large equities trades has several key limitations. Sending shares back and forth between aligned parties to stimulate demand and drive up the price is clear market manipulation and illegal. Moving large amounts of crypto between wallets owned by a single entity is possible, legal, and might be done within the normal course of business for a crypto exchange. One such example is the April 10, 2020 transfer of 161,500 BTC, the largest BTC transaction ever at the time. It caused a momentary stir on social media until the CTO of Bitfinex tweeted an explanation:
The reason for initially moving so much BTC — when only 15,000 were staying in the destination wallet — was not given.
Spreading smaller purchases or sales out over time is a viable strategy, but it is difficult because volatility is generally higher in the crypto market than in equities markets. Accordingly, an investor might find this more difficult than slowly taking a position in a publicly-traded company with lower volatility.
Something that is unique to crypto, however, is an investor’s ability to buy up different cryptocurrencies to avoid a singular large purchase of one type of coin. The other currencies can be traded for the final desired coin on an exchange — without having to convert any of them to cash!
As crypto usage and market caps grow, the relationship between the crypto markets and equities markets will become more complex and robust, allowing for more strategies to guarantee upsides, limit downsides, and mitigate risk. Buying shares of a publicly-traded crypto exchange can already be seen as a sort of blended investment — the performance of the stock is highly correlated with the price of the cryptocurrencies the exchange offers for trading.
Familiarity with the rules and strategies that govern equities markets will increasingly serve the prudent crypto investor. At Defy, we are committed to giving you the education and tools needed to navigate the exciting world of cryptocurrency investing. Follow us here on Medium and on Twitter to read more articles like this, and make sure to subscribe to our newsletter for the latest updates about the Defy platform that will be introduced later this quarter.