Bitcoin pioneer Jered Kenna has teamed up with online broker dealer TradeZero to create the world’s first dark pool exchange for Bitcoin and eventually other digital currencies. Dark pools are the name given to private exchanges or forums for trading securities, which facilitate very large orders without impacting the market and creating adverse price movements.
The Bitcoin market is less liquid than traditional FX and hence more volatile.
Dark pool trading in Bitcoin would be useful to mainstream investors who may want to make large trades in Bitcoin, or use it as a currency hedge without alerting the market to their positions.
Kenna, who launched the first US Bitcoin exchange in 2011, brings a wealth of experience to the table. He told IBTimes UK: “Dark pool trading certainly mitigates volatility where individuals making large trades are concerned.
“If a significant holder were to decide they wanted to liquidate their Bitcoin completely and dump it on an exchange all at once then the price could drop quite a bit. Similarly, if another individual places a massive buy order the price would likely rise.”
In traditional markets a so-called “block trade” is generally 10,000 shares of stock, not including penny stocks, or $200,000 (£154,000) worth of bonds. But how big a trade in Bitcoin would be likely to start moving its price?
Kenna said: “The size of the trade required to move the market in Bitcoin is considerably smaller than what traditional forex traders are used to. Naturally it depends on how fast you’re looking to accomplish the trade and current market conditions.
“Often, there is a relatively large amount of bids and asks near spot, but we’ve also seen times where liquidity is incredibly thin and small trades are capable of moving the market.
“TradeZero has a minimum initial deposit of $10,000 or equivalent. If you’re trading above that amount you will likely save on slippage and benefit from the direct relationship with an account executive.”
Following the Bitfinex hack, security is high on the agenda for anyone involved with Bitcoin exchanges. Kenna said he has always seen security as the number one priority. “Since 2009 I haven’t lost a single Bitcoin to hacking or theft. Bitcoin isn’t as forgiving with mistakes as traditional banking, and extra precautions need to be taken.
“I unfortunately don’t have all the details on the relationship between Bitfinex and BitGo and what happened behind the scenes. A key BitGo feature allows their clients to set various limits for withdrawals that can then be manually overridden.
“This prevents an unusually high number of coins from being withdrawn without approval. If they were using this correctly, I doubt we would have seen such a high amount stolen.
“At TradeZero, if something beyond the preset limits occurs, we will contact you first to verify. Reaching out over the phone to verify that you actually do want to suddenly transfer your entire balance is a slight inconvenience that is incredibly reassuring,” said Kenna.