| There's been a lot of talk about how cryptocurrencies are maturing into more of a mainstream asset class following the wildly successful launch of spot-Bitcoin and Ether exchange-traded funds and other forays into the space from traditional finance firms.
Well, perhaps. Yet a major flash crash in Ether as leveraged positions were liquidated served as a stark reminder of how digital-asset markets still lack almost all of the guardrails installed on traditional markets over the years due to various misadventures that hurt investors. The second-largest token was down a bit as traditional markets opened for trading Monday morning in Asia, reacting to concerns about US tariffs against Canada and Mexico. Then in a matter of minutes its losses extended to about 27%, before quickly recovering.
Mind you, this was Sunday evening in the US. The Grammys were on TV. It was about 2 a.m. in London. Asia is a hotbed for crypto-derivatives trading so it was perhaps not exactly the most-illiquid moment of the week, but it was far from the most liquid time either. That has placed a lot of scrutiny on the market makers whose mission is supposed to be to maintain orderly price action.  "If you look at the liquidity, you look at how much volume it took to drive this markets down, it was not that high," said James Davies, CEO and co-founder at on-chain futures and options trading platform Crypto Valley Exchange, told my colleague David Pan. "That implies market makers pulled out of those markets."
Mind you, these are issues that traditional markets have faced in the past, even though they're not typically open when the Grammys are on. And while there's no guarantee that they've solved the problem, major guardrails have been erected to minimize their occurrence.
Market makers on exchanges like Nasdaq's are subject to strict registration requirements and required by law to, among other things, provide offers to both buy and sell at prices that are close to where the securities are trading. Meanwhile, trading in individual stocks and even the entire market can be paused during periods of intense volatility.
In crypto, on the other hand, market making firms often double as propriety trading firms and they are subject to a much looser hodgepodge of requirements from dozens of exchanges around the world and no overarching legal framework governing their trading. And there are, obviously, no circuit breakers to halt trading in times of chaos.
There's no indication that any of that is likely to change anytime soon. So Sunday night's price action in Ether – and similar dives in a slew of other altcoins and memecoins – serves as a reminder that for better or worse this asset class still exists far outside of the padded walls of traditional markets, regardless of how much tradfi embraces it.
Perhaps Evgeny Gaevoy, CEO of market maker Wintermute, put it best in a tweet on Sunday evening: "To those who think it's not nice to make jokes about degens who lost their life savings on doing levered bets, on cat inside bread," he wrote, referencing memecoins based on jokes about inbred cats, "it is maybe not nice, but you are in a most insane casino ever created, grow up." |
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