A disclosure: I have always thought that the price of crypto assets is their least interesting feature. By now any traders reading this are probably howling in disgust, and I don’t disagree with that reaction – my point is that crypto is about so much more than “alpha.” Nevertheless, I acknowledge that trading is a key factor in the industry’s growth, and deserves more respect than my glib comments might imply.
This op-ed is part of CoinDesk's Trading Week. Noelle Acheson is the former head of research at CoinDesk and sister company Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
This is worth unpacking a bit. First of all, what do I mean by “trading”? For the purposes of this discussion, “trading” involves the buying and selling of crypto assets and related derivatives on a short time horizon with a view to making a profit. I also have in mind individuals and institutions who explicitly are there to make a profit based on their decisions, rather than market makers who trade based on client moves and who provide a necessary market infrastructure function. Of course, this is a simplification, but it helps to differentiate “trading” from longer-term “investing.”
Why? Because “investing” is what grows industries and wealth. Put idle money to work where it can help build businesses, ecosystems and entire economies. Get compensated for the longer-term risk. If the project fails, there is usually some residual value, and even if not there’s the takeaway of experience and lessons learned.
“Trading,” on the other hand, is often compared with gambling in that fundamentals have less to do with the outcome. This is usually unfair because good traders can read market signals to build an informed opinion on price direction, and excellent traders are good at detecting changes in sentiment that can change momentum even without new information.
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But signals and sentiment tend to have little to do with an asset’s fundamental outlook, and many traders do not care about the underlying characteristics. They don’t really need to. A friend – founder of a market infrastructure company – once told me: “I’m not here for crypto, I just see a market opportunity.” The implication was that he could just as well be setting up a desk to trade organic coffee beans. It wouldn’t matter to him or his investors, as long as there was money to be made.
Many individual traders are also here for the money. Crypto asset volatility is often cited as a reason for investors to stay away. But for those who think highly of their trading prowess, volatility is a reason to dive in, especially when several platforms offer eye-popping leverage.
This is the main reason a large cohort of crypto “believers” – those of us who are here for the ideology of decentralized finance and/or the technology of independent distributed systems – look down on traders. And not just crypto “believers”: my 20-year-old daughter was explaining to me the other day that one of the main reasons her friends are put off crypto is the “bros” at parties (and they’re usually guys) who think bragging about how much money they’ve made will get them some flattering attention.
And of course there’s the damage done by certain hedge funds with dubious profit-maximization strategies, decentralized finance (DeFi) platforms fueled by yield seekers, and those that use liquidity to manipulate prices in order to win big when others lose.
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Traders have a bad rep, especially when they win and flaunt their winnings. And when they lose they tend to get scant pity.
But here’s the thing: Without traders we wouldn’t have liquid markets, and without liquid markets we would not have institutional interest. And without institutional interest, our industry would still be insignificant, poorly funded, less innovative and more vulnerable to regulatory interference.
Our industry needs traders. They provide liquidity which, in theory, leads to less volatile markets. They keep markets honest by acting on price irregularities, ferreting out overlooked information, and facilitating the expression of opinion. Traders enable prices to respond to information fast. They encourage innovation in exchange technology and asset sophistication, which makes the market more robust. They act on information that is not valuable to a longer-term investor but which adds greater depth to the messaging inherent in prices.
And the more traders that pile in because crypto is the “Wild West,” the more regulatory attention the market attracts and the less of a Wild West it becomes.
As for their motivations, who cares? (Except for the guys thinking my daughter will like them because they are clever traders. I mean really, wise up.) No two people are involved in this space for exactly the same reasons and with exactly the same skill set. That diversity of thought and background is one of the ecosystem’s most prominent strengths. And there’s nothing wrong with wanting to make money – the profit motive underpins the modern economy, and the freedom to pursue it legally is one of the great advantages of our society.
Just like entrepreneurs, managers, artists and chief financial officers who put their experience and skill set to work building out innovative Web3 ideas, traders contribute a particularly valuable function toward making this industry viable.
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What’s more, it works out: Traders who are just here out of self-interest inadvertently support the crypto ethos by making the market more decentralized and resilient. They may not care about the promise of individual empowerment and censorship resistance but their presence makes that a feature of crypto markets by mitigating the opportunity for the wealthy to exert undue control, and by ensuring the dissemination of relevant information in the form of unencumbered pricing.
And the liquidity they provide fosters trust in crypto pricing that in turn encourages more investment. This strengthens many potential crypto use cases by providing resources as well as the incentive to build products the market will value.
Bitcoin may have gotten its start at the grass-roots level, with no marketing whatsoever, based on the appeal of an idea. But without the potential for profit, it would have remained just that.
In an industry built on a new concept of trust, traders counterintuitively make the industry more trustworthy. The short-term outlook enables longer-term investors to have more confidence in the market, which in turn encourages more longer-term investment.
So, to all who think traders are short-term opportunists who give our industry a bad name, just imagine what it would look like without them. A truly decentralized system is open to all. And traders, whatever their motives, help to reinforce that decentralization.