Over the past week, the price of Bitcoin has dropped by more than 35 percent, and the majority of analysts in the crypto space have shared the sentiment that the crash was triggered by the contentious hard fork of Bitcoin Cash.
According to Bart Smith, the head of digital asset at trading giant Susquehanna, a lack of liquidity in Bitcoin markets allowed the dominant cryptocurrency to be vulnerable to a large sell-off caused by the Bitcoin Cash hash power war and hard fork.
In the months to come, Smith explained that the entrance of Fidelity, ICE, and Bakkt into the cryptocurrency market could increase the liquidity of BTC and lead to a rise in capital in the space to soak up big sell-offs.
Importance of Fidelity and Bakkt
Currently, it is fairly difficult for an average trader to invest in the cryptocurrency exchange market through trading platforms like Coinbase and Bitstamp. Investors are required to hand in photocopies of government-issued documents, undergo rigorous Know Your Customer (KYC) processes, and comply with policies enforced by exchanges.
— CNBC’s Fast Money (@CNBCFastMoney) November 20, 2018
The impractical systems adopted by cryptocurrency exchanges as per the request of government agencies in the US, Japan, South Korea, and other leading digital asset markets have limited the cryptocurrency market to a relatively small group of investors that possess a certain know-how to invest in the emerging asset class.
“Number one, the on-ramps for new capital is very difficult. If you’re a global institution, it is still very difficult to buy Bitcoin in a way you might want to. A wealthy individual from the G.I. Generation is not going to take a high-resolution picture of their driver’s license and send it to a website and send money there. They want to invest with Fidelity. They want to invest with Bank of America.”
The Susquehanna executive added that the limited number of fiat on-ramps in the cryptocurrency market made it difficult for Bitcoin markets to absorb growing sell-pressure placed upon by investors that have started to lose confidence in the short-term trend of BTC due to the Bitcoin Cash hard fork fiasco.
“That has led to the second problem which is without the new capital on-ramp, liquidity has been very low. And so we’ve kind of seen a stable price all through summer, it was at $6,000 give or take. Volatility got really light at the end of July. So what happens is in that environment, if you have a contentious fork, it does not necessarily create a tremendous amount of confidence and when those sellers come in, there’s just no liquidity to absorb it. Hopefully, with Bakkt, Fidelity, and further regulations, there are going to be enough capital to soak it up.”
Targeting Retail Traders
As of now, both Fidelity and Bakkt are leaning towards institutional investors as their target client base. But, if financial institutions like Fidelity, Goldman Sachs, and Morgan Stanley begin to provide cryptocurrency investment services to retail traders as proposed in October, it could substantially increase the liquidity coming from individual investors in the crypto space.
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