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Cryptos have exposed the flaws in legacy financial markets

With 24/7 trading, a choice of exchanges, no special privileges for big-money institutions, and the democratisation of finance.
Legacy markets give competitive advantages to those with deep pockets, but this is about to change as technological advances in the crypto sphere will spill over into traditional markets. Image: Chris Ratcliffe, Bloomberg

Cryptos have democratised financial investing in ways traditional equity and bond markets never did. You can open an account with a crypto exchange and buy R10 worth of bitcoin. Try that for size with an equities broker.

On a crypto exchange you can trade day and night, and through weekends, all at very low cost.

You can do the same in forex markets, but equities markets trade only during certain daylight hours, with pre-and post-market trading open only to certain types of investors.

A new report by crypto exchange Kraken Intelligence entitled ‘Traditional Markets vs Crypto Markets’ shows how cryptos have leapfrogged traditional markets in several crucial ways.

“At a $1.3 trillion market capitalisation and counting, the evolving crypto asset market enables anyone with an internet connection to participate side-by-side with multibillion-dollar institutions on the same platforms and using the same open source, publicly-available information found on a public blockchain, Github, Twitter, and other public platforms. The crypto market is transparent and open to all, and has not had the types of recent mishaps in the traditional financial markets.”

Legacy markets give competitive advantages to those with deep pockets, but this is about to change as technological advances in the crypto sphere will spill over into traditional markets.

Crypto vs traditional markets

A key inefficiency in traditional financial markets is the number of intermediaries required to process an order. Most market participants are not entitled to trade directly on exchanges, leaving the investor at the mercy of intermediaries (such as the exchanges themselves), who can order trading halts or other potentially market-influencing events.

Trading halts are typically ordered to stop excessive volatility in equities. No such mechanism exists in cryptos, barring purely technical glitches. That means there is nothing to stop the often wild volatility experienced in crypto prices.

A crucial advantage of cryptos over traditional markets is the absence of intermediaries. Trading in equities requires a broker or financial advisor, who is obliged to act in your best interests for a fee. However, there is abundant evidence of intermediaries churning (over-trading) accounts to generate fees or, more normally, slapping on an annual management fee as a percentage of assets under management – regardless of performance.

For those who don’t use an investment advisory service, like a financial advisor, investment decisions can be directed to a broker-dealer such as Robinhood, E*Trade, TD Ameritrade and others. In such instances, the broker-dealer may route your order to a trading venue for execution or sell you stock directly from their own inventory.

Brokers make money through trading fees, while dealers profit from a bid-ask spread, which is the difference between the price the client buys or sells a security at and the price at which the dealer bought or plans to sell the asset.

High frequency traders (HFTs) are able to exploit inefficiencies in legacy markets, and invest vast sums in equipment and cables to get a few micro-seconds jump on the rest of the market in the placement and execution of orders.

The crypto market is cloud-based and fragmented into several exchanges, limiting speed advantages based on geography.

Regulatory or management interference in traditional markets is a worrying trend, such as happened at Robinhood, Ameritrade and Charles Schwab, which suddenly suspended trading in ‘meme’ stocks like GameStop. There are no centralised authorities to halt trading in crypto assets.

The events of the GameStop ‘short squeeze’, where hedge funds were forced to liquidate short positions after an army of Reddit traders bet against them, expose another flaw in traditional markets. At one point, the shorts on GameStop were 140% of the total available number of shares in issue, highlighting a critical rupture in the existing market system.

Read:
‘Game over’ for hedge fund
Is bitcoin headed for a GameStop-type short squeeze?
‘Shorting’ in SA

In crypto markets, most participants can sign up with an exchange of their choice where they themselves can submit buy and sell orders to the same orderbook that billion-dollar financial institutions use. Unlike traditional markets, there is no need to rely on an intermediary to execute your order and settlement is done through the same venue with which you placed the order. This is done via a centralised exchange (which operates like an independent stock exchange), decentralised exchange (an exchange allows peer-to-peer buying selling of assets without an intermediary, using blockchain technology to keep track of orderbooks and facilitate trades), or an over-the-counter desk.

Decentralised exchanges are not as reliable as centralised exchanges as there is no central entity ensuring trades are executed, there is no customer support, and service is slow and often expensive.

“With crypto, market participants directly participate in order generation and execution by signing up at an exchange, going through the verification process, funding their account, and sending a trade to the exchange’s order book all on their own. Market participants have full visibility into execution prices and the exchange’s orderbook, which allows them to seek best execution without relying on intermediary – though some market participants ought to be wary of the exchange’s trading fees and potential for slippage,” says Kraken Intelligence.

Settlement of trade in traditional markets – which involves transferring assets between buyers and sellers – can take two days or more, depending on the market.

Comparatively, settlement of crypto transactions can take several hours, but is sometimes completed in minutes. Trades are settled by an exchange on its books or once it has sufficient confirmation on the relevant blockchain.

Traditional markets can no longer resist the technological leaps brought about cryptos, cryptography and blockchain. They will be forced to adapt to this revolution.

“We believe the future of traditional finances [is] eventually headed towards democratised investment systems that aggregate the resources of millions of people to drive innovation and economic prosperity,” says Kraken Intelligence. “This democratisation will change how we see securities trading, how we view investing and how the average person can benefit from it economically.

“Anyone can invest in what they believe will bring about progress or have value, share their findings, and reflect such convictions real-time in the marketplace. There will be no pre-market trading or post-close trading sessions that are open to certain types of investors, or additional fees to utilised services.

“Markets will come to mirror that of cryptocurrency markets that are accessible without a broker, and run 24/7, 365 days a year.

“Furthermore, with low-to-no fees, the concept of investments will be made approachable for the average person with a small amount of capital.”

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The above is pure marketing gobbledegook, trying to talk up a failed technology, which is not, and will never be, a real currency. Furthermore, there is not one single example of the widespread adoption of blockchain technology, more than a decade later. Blockchain has failed completely, in other words, because any fundamental technology, say SQL, that is worth its salt and a better mousetrap, will become widespread within months. Blockchain is clearly not better or useful.

Blockchain is solving a “problem” which can be and has been solved in far better ways, and its main selling point, being anonymous and public, is also its downfall. I want to know that, when I invest in a so-called “legacy” (LOL!) market, that I have some kind of comeback if some rogue broker rips me off. This is non-existent in bitcoin – just ask Cheri Marks’s “investors.”

All that the above article promises, is that criminals are able to rip you off 24×7.

What an insufferably stupid comment. Blockfi just got a $3B valuation, BTC hit $12+ billion cleared on chain per day. Bankers are resigninng in droves and coming to work in Fintech.

You’re confusing hysteria and a bubble with real value.

In the 1700s, you could buy a nice house in Amsterdam for the price of a single tulip bulb. And then, the mania stopped and the bubble burst. Today, you can buy a packet with multiple bulbs in a supermarket for less than 10 euros. Good luck going to the Netherlands and buying several houses with your packet of tulip bulbs.

I will explain blockchain a lot easier for you and then you might rethink your comment…

Blockchain has existed for thousands of years, going back to the first marked currency. In its analogue form it appears todays the characters on bank notes; Cheques and as transaction reference number which is printed. Digitalising Blockchain has created strings which as in the past hold reference to the transaction while keeping a record.

Today transactions of Blockchain in use with Cryptography can be seen in the Hyperledger.

Whilst i do agree with you that its inefficient, however far more efficient than the old accounting methods which as @CTececutive is clearly referring to by the droves of professional which see the old banking systems as old and redundant.

In the old industry of construction we are seeing the use of BlockChain which is used to record all the materials of the project and their final location, this then give greater view of the building before and after completion and helps us develop a sold preventive maintenance.

Yes it uses terabytes of data but the technology for that is being developed. As i write this, drones are flying on projects surveying logging information and blockchaining the data.

As somebody who’s got a Master’s degree in computer science, and started off writing C++ 3 decades ago, and have never stopped coding since, thank you so much for your patronizing explanation of blockchain, even if you are confusing blockchain with so-called cryptocurrencies and even though your analogy is therefore totally wrong.

The sequential numbers on a bank note are stored in a database, and so are all EFT, cheque and credit card transactions. A highly secure one, but a database nonetheless. Except for the mirroring and the backups, which are just copies of the same thing, managed by the same authority (Visa, a bank, the Reserve Bank, etc), it shares none of the characteristics of blockchain, which include a distributed ledger, a series of small files recording each transaction and calculating complex sums to check and compare the validity, etc. I won’t bore you with all the technical details.

Suffice to say that, no, neither cheques, nor credit card transactions, nor EFT transactions, nor the bank notes, use blockchain in any way, 10 years later. Again, let me not bore you with the details of very valid reasons why not, but blockchain is for example too slow to come near the kind of processing volumes that Visa does every second. There are very good, fundamental reasons why blockchain will remain too slow, and although banks are also hit by fraud, the security of traditional financial databases puts the criminality involved in crypto completely in the shade.

Again: blockchain – and note that I didn’t conflate blockchain with so-called cryptocurrencies (which aren’t) – is a useless technology which solves a problem which doesn’t exist any more.

So you are telling me even with all your knowledge and experience you still have no idea what Sound Money and Purpose of either Cryptography and Block Chain.

I guess ignorance is bliss.

I’ll keep buying bitcoin not because it’s going up in price but rather because the world leaders and bankers are in bed together which together they are devaluing fiat currency.

Bitcoin will not $400,000 which solved no problem other than creating a Sound Money System.

Good Luck Mate.

@PurgeCoin – personal insults just go to show your own profound lack of understanding about what bitcoin, crypto and blockchain really are. You’re the one who is going to need good luck, with such utter ignorance, mate.

@Incitatus,

That was barely an insult and I apologise if it was taken like that.

Whilst I have a firm position for Bitcoin and Bitcoin only, my view for the rest of the cryptos are the exact same replication of fiat currencies in that there are group of people who can anytime create more of their crypto without the agreement of the all the participants.

I would strongly recommend your read or listen to a book called
The Bitcoin Standard, if its your first Audible book then follow the link and get it for free https://a.co/ehIg99U

Further more i do agree with you, i lack the complete understanding of Bitcoin, but one thing we cannot deny is that this is something special, unique and maybe just something that will not be replicable ever again.

Buy and hype. This is the principle on which bitcoin has operated from day one. Everyone getting into it would become a hype artist. And there would be no metric by which its price could be judged. These two factors were the true genius behind bitcoin.
This has nothing to do with monetary anything, but is a form of gambling that relies on ever more new gamblers entering the casino and bidding up the price, with more and more gamblers selling each other the bitcoin, all united in the singular purpose of driving up its price so that everyone could get rich.
This form of gambling relies on ever more new gamblers entering the casino and bidding up the price, and that it would be everyone’s job to draw in new gamblers, like a giant pyramid scheme.
All these gamblers in the casino are all united in the singular purpose of driving up the price so that everyone could get rich.
These gamblers would not bet against each other or against the house. They would enter into a special gamble where they all would be on the same side, where each would do what they could to drive up the price to make each other rich.
After bitcoin came the other cryptos. There are now over 4,000 cryptos out there, including some that started out as a public joke. Anyone and their dog can start a crypto and hype it and hope to get some traction.
The whole crypto space combined now has a market cap of nearly $2 trillion. Over half of which is bitcoin.
Bitcoin doesn’t produce anything. It doesn’t have a physical presence, such as gold has. Bitcoin doesn’t have revenues or earnings, and it doesn’t pay interest or dividends, and it doesn’t have any other metric by which to judge its value.
And that’s the key to its price.
No one can ever say bitcoin is overvalued or undervalued. It doesn’t have a value. It just has a price, and what the price is from one moment to the next is determined by gamblers trying to drive it higher by hook or crook, and by some of those gamblers cashing out while they can.
There is therefore no theoretical limit to the price. The theoretical range is between zero and infinity. The price is beyond the idea that something is making or not making sense. It’s just a number. It’s not related to anything. There is no dividend yield or any other yield, no earnings per share, no P/E ratio, no cap rates… none of the performance metrics we might look at apply.
And unlike gold, which doesn’t have performance metrics either, bitcoin has no physical presence. You lose your password, the bitcoin are gone.
There is no yardstick as to where the price should be. So the idea is that this price could go to infinity.
People say that because the supply is limited to 21 million bitcoin, and because demand is unlimited, this will drive its price to infinity.
Yes, maybe, theoretically. But there is no need to have bitcoin, and demand can go back to zero and this wouldn’t impact anything in the real world, except the perceived wealth of the bitcoin holders that haven’t sold. No one needs bitcoin. It’s just a gambling device. The demand is artificial, and that artificial demand can vanish in no time.
The big obligation is that all gamblers in this casino have to use whatever megaphone they have to drive the price higher. And it appears that the big players have now ganged up, the biggest Wall Street players, and creatures like Tesla, and a bunch of hedge funds, with huge global megaphones.
And it’s always the same principle. Buy some bitcoin quietly, then make a big announcement and hype it to high heaven.
There is, however, a problem that reasserts itself periodically. Every now and then someone tries to get out from the position and get some despised fiat currency, such as dollars. And when there are not enough new gamblers willing to buy at that price, the price drops until there are enough gamblers willing to buy. This has eviscerated bitcoin in the past. When this artificial demand vanishes, the price can plunge so fast it makes your head spin.
Now the gamblers are huge outfits with billions of despised fiat dollars tied up in bitcoin. They couldn’t care less about the “monetary experiment.” These are not true believers in bitcoin. They’re in it to make a huge profit denominated in despised fiat dollars.
They know they can rig the bitcoin market with their big megaphone, at least for a while. And they have done it loudly and clearly. But when they want to take profits and get some despised fiat dollars for their bitcoin, as they all will, because that’s what they’re in business to do, who will be there to buy?
These are big positions, and they’re tough to get out of without blowing a huge hole into the price, that then triggers a cascade of selling. And when this happens, there is suddenly no liquidity, and the bottom falls out. Bitcoin has become legendary for this.
But now the amounts are much bigger. So maybe they’re hoping that, when demand suddenly vanishes, the despised Fed will step in and bail them out of their bitcoin by buying their bitcoin and handing them billions of despised fiat dollars in order to prevent their highly leveraged and interconnected funds from taking down the financial system or whatever.
And that day, ladies and gentlemen, the day that the Fed bails out the biggest most leveraged bitcoin gamblers because the price collapse of bitcoin is threatening to take down their highly leveraged funds, thereby threatening to collapse the entire financial system – that will be the day bitcoin has truly arrived.

You are old school and you are used to a centralised methodology with your SQLSERVER and clients all making requests. You need to understand what Decentralization means and censorship resistance. Those are the 2points you are not understanding. You are worried about the technology efficiency of doing transactions but this is not the valuable issue for mankind you need to think bigger picture. Its about levelling the playing field and not playing in the financial world of wall street where they cheat and collude and the man in the street is robbed all the time. Crypto is true freedom and it cannot be manipulated because there is no one single person or institution or government or central banks that controls it. GOLD is manipulated! The US DOllar is manipulated! Liberate yourself look at the big picture. Good luck!

Nope, sorry, I said nothing about centralized technology. There are plenty of frameworks that have been around for ages allowing distributed transactions, such as Enterprise Java Beans. Nothing new and no need for Blockchain either.

But anyway, being a True Believer and Liberate, when you’re going to the shop tomorrow, you’re, of course, going to use your bitcoin to buy bread and milk? Oh, wait, you won’t. Because you can’t. Because even you know that bitcoin is not a currency. So you’re going to be stuck using rands, dollars or euros forever, even though you like to imagine you’re somehow liberated.

Denial.

Not a river in Egypt.

If the moderators allow this link, all of your True Believers should read this comprehensive rebuttal of crypto and blockchain. There are multiple links to articles within this write-up, and it’s well worth reading all of them. (And by “rebuttal” I mean “a comprehensive demolition of all the crypto and blockchain BS”).

https://davidgolumbia.medium.com/cryptocurrency-is-garbage-so-is-blockchain-3e80078e77fe

And yes, I am extremely old-fashioned, in the sense that, if I have to make an investment using my children’s inheritance, I like to understand what I am investing in.

@Incitatus In other news this month…

“Elon Musk’s Tesla buys $1.5bn of Bicoin”

“Cash App can now instantly send bitcoin to other $cashtags for free, right from your Cash App”

“Morgan Stanley becomes the first big U.S. Bank to offer its wealthy clients access to bitcoin funds”

“Visa plans to enable bitcoin payments at 70 million merchants”

Yeah….right….let’s see. I buy something using my Visa card and Bitcoin and pay the rand equivalent of R1000. Within a few weeks, bitcoin rises due to its extreme volatily and now I could have bought the same thing for the rand equivalent of R700. Now I have buyer’s regret – I should have held on to my bitcoin, because its price is rising and in future I can buy more. This is the nightmare known as deflation, and yet another reason why bitcoin is not and will never be a true currency.

Or, I am a car dealer, and I sell a car to somebody for the bitcoin equivalent of R300,000. Within a few weeks, bitcoin crashes (again). I am stuck with R200,000 in bitcoin equivalent value, and this eats up all my profit and leaves me with a loss.

Do you still think 70m merchants will all just accept bitcoin? Nope.

Just by the way – Morgan Stanley also enthusiastically participated in the subprime mortgage bubble. Go and watch the movie, The Big Short.

BTC is a store of value, not a medium of exchange.

You can choose to participate or not, your choice. Amazing thing hey, freedom.

Have fun staying poor.

Can’t wait for these greedy institutions/brokers too become obsolete.

What do they actually do ??

We lose a 1%-2% of our capital every time we trade – for what !

Whether you trade a R 1000 or R 100 000 or R 1 000 000 – its the same technological process at play but why charge the percentage commission. not a fixed rate – but funny enough if you trade a small amount then there is a fixed flat rate – that varies bwt R 150 – R 250. (sob’s)

The days of eating and stealing our lunches will soon be a thing of the past.

Let’s say the brokers screws up the trade. He is now liable to you for damages suffered.

Is the damage the same on R1000/R100 000 or R1 000 000?

“You can open an account with a crypto exchange and buy R10 worth of bitcoin. Try that for size with an equities broker.”
Funny thing, with some unnamed online equities broker, that is precisely what I did.

Try to get your R10 back !!!

…yes, that”unnamed online equities” discount broker, works like a charm.

If you trade R250 or so, the cost is around R1,50.

So trading R10 may cost you 6 cents. Super EASY.

Article is full of hype and conjecture without backing sources. Essentially it is a marketing attempt disguised as a news.

Right you are.

And therein you have just summarised the world of cryptocurrency.

There is nothing driving it apart from hype and conjecture.

If crypto has a “market capitalization” of $1.3 trillion dollars, what is the market cap of the US dollar?

Asking for a friend

Bitcoin market cap is $1.1trln today. USD way higher. All fiat currencies in the world even higher. Huge runway for Bitcoin as people diversify to store value (or whatever other reasons). Remember rate of bitcoin growth is low and built to slow even more every year. I’m a fan, but still waiting for a gap to buy big in the next dip and then hold. Other cryptocurrencies look very temporary to me…

I have attempted to find answers to a few basic questions, such as the best mobile wallet for crypto and why? Such as just how do I avoid exhorbitant fees that are reported to be charged at ATM’s and most all means of buying and selling?
The answers appear to be the domain of misinformation that conflicts the stories of ease and low cost in articles such as this.
The lack of regulation appears combined with a certainty of full disclosure to the authorities.
The claimed transparency seems to be a one-sided affair.

Regulated exchanges also started out as unregulated private entities where parties could trade directly with each other without intermediaries. Things evolved to regulated markets with regulated brokers to protect investors.

The unspoken reality is that transaction costs on regulated exchanges are a fraction of those in the physical market. Take real estate for instance. The brokerage costs are less than 10% of the costs structure of investment in physical property.

One could even make the argument that the small brokerage and stock exchange fees are simply a form of insurance that ensures that the likes of Cheri Marks can’t rip you off as easily, as she allegedly did twice in the unregulated Wild West that crypto represents.

well said!

Ever heard of Enron, Steinhoff… If you don’t know any of the thousands of listed companies that have turned out to be scams then no one can help you.

@Skopskiet – there are legal consequences for the likes of Enron and Steinhoff, inadequate though these may be. Crypto scammers suffer no such consequences.

For those who fancy Bitcoin & other crypto developments…..you can visit “Moneyweb-Crypto” link.

For those more into traditional Fiat currencies & related investments….we can visit “Moneyweb”, the ‘legacy’ site.

But wait, it’s ALL ON ONE website! What?! 😉

It’s like publishing a religious/Christian magazine, and then allowing a back section for Atheists interests! *lol*

Or a Gun magazine publication, and having a section for the Anti-gun lobby….?

Just ignore the articles you don’t like Michael.

Good point Pin 🙂

But then, why bother visiting the site?

Not comparing apples with apples. Firstly, the JSE is not the gold standard for so-called “legacy” exchanges and any comparison between a crypto asset trading platform and an exchange should rather be made against a new exchange such as ZAR X domestically or any MTF globally. The market structure of the JSE effectively precludes retail investors (less than 0.5% of flow is retail) unlike Asian and US markets where retail flows account for at least 15%-20% of total market flow with low execution costs.

Market abuses occur in both environments. Unlike exchanges which are not counterparts to trades, crypto platforms often take (undisclosed) positions against investors effectively front-running orders through networked dark-pools. So in addition to taking a turn on the trade they also charge commission. At present institutions account for a small percentage of crypto flows unlike traditional exchanges where institutions dominate . As soon as regulatory changes permit institutional investors the same practices will occur.

Critically, exchanges provide certainty of settlement and asset holdings. With most crypto platforms there is no legal segregation of funds – if the platform collapses there goes your cash. Nor is there a clear line of sight to your crypto unless you hold them in your own wallet off-chain. A statement from a crypto platform provides no comfort.

It will be interesting to see how many crypto platforms survive once regulation sets in.

Haha. This is much fun. The Roman horse, the person born before another, the oke from Klerksdorp , Mr Buys and a couple of others vs the hordes threatening the empire ( or so they think , the empire would say) Has the horse bolted, is the world changing more rapidly than 10 years ago? Who is in bed with who? Is the talking head on BBC news real or a Deep Fake? Has this deep Medium article been created by GPT-4 or …not? Is it Tom Cruise playing golf there….or not? Will Elon Musk be the modern explorer crossing the ocean in a small canoe, doing island hopping? What has Boston Robotics designed that we dont know of(and should) Growing mice from ovum stage in a “mechanic” womb up to limb stage is real. Soon….. We have moved beyond the abyss or is it the new dawn? Morals dont count once historic ethics are frog jumped. What will happen in 5-10 years? I will give you the short and complete answer; Nooobody knows. Ask him

End of comments.

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