As the cryptocurrency trend rises, there are many terms that represent the activity and most of the things within it that you should know. Among many terms, there is one that will be described in this article, called dark pool. Do you want to know about it? Let’s dive in.
During the bear market, you use your common sense to sell your 20,000 bitcoins to fund something that you plan. However, selling 20,000 individual bitcoins would very certainly result in a huge market movement. So, instead, you consider signing up for what is known as a dark pool.
It is a private exchange or specialized platform for trading securities that are not accessible to public investors, especially for large investors who want to trade a huge amount of assets. The options are there is no publicly visible trade and the order book, or it becomes visible right after the trade is done. Dark pool in cryptocurrency operate similarly to traditional financial markets.
By signing up for this forum, you can sell your assets privately without having such a large impact on the market and also avoid public exposure. Moreover, this can be used to avoid slippage, price volatility, the fear that comes with witnessing a whale selling its coins, or just to obtain an average price for a big number of crypto. Let’s break it down one by one below.
When executing a transaction, slippage occurs when the market price does not match your intended price. Because you are not exposing it to the public, your estimated price will likely be the same as the sold price if you use the dark pool.
Due to the market’s supply and demand, the price of the crypto will change if you suddenly dump a bunch of cryptos back into the market. This happens because when you put a bunch of cryptos, which is the supply, the demand will drop. The dark pool will help you to keep the price stable.
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If you do not know, a “whale” is a term for someone who holds a large number of crypto assets. When you are a whale dumping your coins, other professional traders will think that you know something, and they will follow you. This will instantly cause the price to crash even more.
Some dark pools allow you to enter and tell how many assets you want to sell. Then, they will tell you how much they can afford. This will help you to know the exact amount your asset can sell instead of guessing it.
After you know about what is a dark pool and its benefits, you might wonder what the bad side behind it is. Well, the lack of transparency becomes the main concern when it comes to dark pools. It is frequently criticized because public exchange prices may not correctly reflect the market, ignoring the fact that most investment and trading is based on public information. Even the price can be concealed by the trade facilitation institution if they have a conflict of interest.
Future advances in cryptographic verification methods, on the other hand, will make the dark pool process even safer by utilizing an open-source protocol that can verifiably retain the same rules for each contributor.
The dark pools operate in an intriguing manner, and they are typically used by large investment portfolios that sell a large quantity of cryptocurrency every day, when contrast to market orders, most dark pools employ limit orders.
A limit order allows you to purchase or sell at your own price. A market order, on the other hand, examines all of the other limit orders and then interacts with the orders that are already in place to make instantaneous trades with only a minor price difference. You receive a quick trade but pay a little amount of slippage.
Either way, you get to pick one variable. Limit orders let you choose the price, whereas market orders let you choose the time. Most dark pools utilize limit orders to ensure that sellers make a set amount from each trade, even if it takes a month to complete.
The dark pool is only accessible to those with a significant amount of money, known as whales, so it feels secretive. People believe whales should be cautious with their powers and use them wisely since they have the potential to disrupt the market. Keep in mind, though, that whales are just like any other investor wanting to make a profit.
Market manipulation is another concern investors heard in the dark pool because they thought it would cause a price to crash. That is, in fact, one of the reasons these investors are using a dark pool. They want to exchange their cryptocurrency without triggering large price volatility. Nonetheless, big amounts of money moving can always generate market volatility. So, the opportunity for that investor to return as a non-anonymous user and acquire a large number of bitcoins to provoke a price spike remains.
The answer is no. Dark pools are as legal as any financial activity. Its practice is even regulated and monitored by SEC or U.S. Securities and Exchange Commission. The dark pool is legally categorized as an alternative trading system.
However, there is still a chance that individual illegal transactions will occur. Moreover, the lack of transparency becomes a concern because it should be a priority in any financial operations. But, as you know it, the advanced technology of the crypto market will help to improve the fairness of the dark pool operation.
Knowing what is dark pool and the detailed information about it is essential, especially if you are active in the crypto market. Hopefully, after reading this article, you can get familiar with this term, and it will help you through your investment journey.