What the fragmentation of the Bitcoin market means for its future

What the fragmentation of the Bitcoin market means for its future

From July 2022 there are 498 crypto borns. No two stock exchanges have the same price offer for Bitcoin at a certain point in time.

This creates problems for institutional investors, the liquidity and fungability of Bitcoin and its future.

To get an insight into the market fragmentation of Bitcoin, their importance and possible solutions, we spoke to the team of Apifin .

fragmentation of the Bitcoin market

In traditional markets, the trade in assets takes place within a regulated framework that was determined by a kind of tax authority. On cryptoma markets, stock exchanges and inquiries use in an order book to determine your own price.

Since these stock exchanges are missing a central regulatory authority, a hierarchy of the price authority is missing. There is no individual metric that everyone can point to and say: "This is the current price of Bitcoin". The next alternative is an aggregated price indicator who mediates the prices of some stock exchanges.

We spoke to Haohan Xu, founder and CEO of Apifiny, to learn more about the fragmentation of the Bitcoin market.

Haohan began with the definition of fragmentation as "the separate and scattered marketplaces in crypto". He continued that crypto exchanges are regionally and tend to "dominate their respective markets with the respective Fiat currencies". In such markets, the prices tend to adapt to their regional supply and their regional demand, or how Haohan expressed it: "... This creates a lot of isolated liquidity pools for Bitcoin. Each stock exchange is essentially their own marketplace, and the participants in every marketplace are only among themselves and have very difficult to use liquidity from another exchange."

This type of market structure prevents many institutional investors and professional traders from achieving the best price and the desired liquidity of Bitcoin and other cryptocurrencies. One solution is the use Intelligent "> Intelligent Order routing to find the best price. ApiFiny records this tool in one of its service offers, APIFNY Connect works on comprehensive solutions for fragmentation.

The status of Bitcoin fungibility

fiat currencies are fun. The value of a dollar is the same in California, New York and all over the world.

The fragmentation of the Bitcoin market, on the other hand, makes it less fun. The price varies from stock exchange to stock exchange. And since the number of stock exchanges changes quickly worldwide, the price from Bitcoin from region to region also varies. This lack of fungability can create problems for those who work with great capital amounts, as Haohan described:

"If you try to buy a large Bitcoin order at once, let's say 10 Bitcoin. A single exchange does not have enough liquidity to carry out this trade with minimal price slide.

liquidity challenges

In 2022, a crypto liquidity crisis caused cascading consequences in all markets. The current bear market or "crypto winter" was characterized by many stock exchanges and loan/loan platforms that suspended and registered bankruptcy.

crypto company such as Celsius Network, Three Arrows Capital, Voyager Digital, Coinflex, Blockfi, Bancor, Babel Finance and Vauld were all affected in one way or another. As a result, they were forced to liquidate all assets they could settle to pay debts. Fragmented markets reinforce this type of sales pressure because they make it difficult to move liquidity to where it is most urgently needed.

For example, a massive sales pressure can lead to a dramatic course slip on illiquid exchanges through a liquidation event - which means that the large market order presses down the price to which it is sold. As a result, a single trade can lead to a large prize -making weight between the stock exchanges. Arbitrage dealers may be able to fill the gap, but this tends to exaggerate losses because it stirs up more fear and continues the liquidity crisis.

If cryptoma markets such as raw material markets were regulated, there would probably be capital reserves requirements that prevent credit institutions like Celsius from levering up too much customer deposits. However, this would not solve the problem of price fragmentation. Bitcoin price differences are a constant reality, regardless of liquidity crises.

Published Taylor and Francis Online A Report of the Bitcoin market. Order book data that you collected on a sample of stock exchanges showed that stock exchanges with a higher volume and higher liquidity consistently cite the smaller stock exchanges in the price movement. This shows that price fragmentation is a result of liquidity fragmentation.

The future of Bitcoin

If global Bitcoin market fragmentation were not addressed, this could delay the maturity of the market. When assets develop, they usually gain liquidity and are more regulated, which contributes to reducing volatility. According to Haohan, continued fragmentation could lead to Bitcoin remains volatile for the time being:

"All smaller stock exchanges lose many commandments and inquiries that are thrown around, and in volatile times the prices can change.

How can this be addressed? The answer could be a mixture of regulation and innovation. To a certain extent, the two are dependent on each other. As Haohan puts it: "Regulation cannot solve none of this without the right tools, and obviously innovators are those who provide the tools. But innovation needs regulation and therefore regulatory authorities could say: 'I would like to regulate crypto in a certain way', but if the tools simply do not exist, they cannot do much."

Everything has to be countered to the liquidity fragmentation by merging the settlement systems of different exchanges. Haohan explains: "The fragmentation actually exists in the clearing settlement layer, not in the market layer. So let's assume that you combine the wallet systems or the clearing billing systems from Coinbase or Gemini, then this dealer can use his money to act on Coinbase and Gemini, and there is no such big problem with pricing in the same ecosystem. “

We asked Haohan what Apifiny is doing to solve these problems. He replied: "We focus on building the infrastructure for professional traders or institutions in order to enable complete access to the market in a way as seamlessly. Our end goal here is to use a strong infrastructure as a method to consolidate and stick a complete crypto market so that dealers from pricing and liquidity have access; New weighting and administration of cross-trading space funds;

apifiny worked hard to tackle one of the greatest challenges for the cryptoma market. It requires fine synergy between innovation and regulation. But as soon as the two have found a clear and ubiquitous solution, they have the potential to trigger a massive wave of adoption. The solution to market fragmentation will lead to price stability and real benefit. Companies will be more willing to use it for their business, financial advisors will be more inclined to recommend digital assets, and consumers are attracted to their user -friendliness and value storage.

This content is sponsored by apifin .