U.S. congressional hearings investigating the rise and fall of GameStop's stock didn’t yield much that was new. However, we did learn just how eager legislators were to grill both Wall Street and Silicon Valley at the same time: Rep. Maxine Waters (D-Calif.) actually interrupted Robinhood CEO Vlaimir Tenev's opening statement.
Legislative animus against technology and finance looks like a bad sign for crypto assets, which still exist somewhat in regulatory limbo. Except that what went wrong with Robinhood and GameStop in January has been remedied on crypto exchanges – superficially, anyway. Consider:
- Robinhood stopped trading in GameStop stock because of the margin requirements of the clearinghouses – middlemen on which it depends (not because of collusion with hedge funds, as many suspected). As GameStop’s stock price spiraled up, the risk that counterparties wouldn’t be able to fulfill their sides of trades went up right alongside it. The clearinghouses' margin requirements – the cash Robinhood, as a brokerage, must keep on deposit to cover those risks – ballooned. Most crypto exchanges don’t use clearinghouses or brokerages, allowing the investor to interact directly with the exchange.
- The risk that halted GameStop trading exists due to two-day (T+2) settlement terms for equity trades. Crypto assets settle in a matter of hours or minutes.
Bitcoin was designed as a peer-to-peer system, eliminating middlemen. But even crypto's middlemen are pioneers. The exchanges on which bitcoin and other crypto assets trade represent market structure innovations that address some of the problems that brought Robinhood to the U.S. Capitol (via videoconference, of course). However, to really solve those problems, crypto exchanges would need to be able to process transactions effectively, including and especially when there's an unusually large volume of them.
As we will see, that isn't the case.
The first chart shows the TradeBlock XBX bitcoin price for the year to date. (The XBX is a bitcoin reference rate that benchmarks billions in assets under management. TradeBlock is a subsidiary of CoinDesk.) The vertical lines signify outages on three major crypto exchanges, as reported by Downdetector, an outage monitoring service. Coinbase and Kraken are two of the four exchanges currently used to calculate the XBX price, and therefore represent two of the most liquid markets accessible to U.S. investors. (The other two are Bitstamp and LMAX Digital; the former had no reported outages, and the latter isn't covered via Downdetector, though status report history provided on LMAX Digital's site indicates no unplanned outages so far in 2021.) Binance is included as an example of a highly liquid bitcoin market that isn’t accessible to U.S. investors.
There are five dates on which multiple exchanges suffered reported outages. All of them coincide with significant price movements. One possible exception is Jan. 28, when all three had reported outages, and Jan. 29, when Coinbase and Kraken did. The XBX bitcoin-dollar price did not move as dramatically on those dates as it did around Jan. 7, Jan. 11 and Feb. 8, the other dates of multiple reported outages. However, bitcoin at that point was beginning a rally that followed a brief dip below $30,000 on Jan. 27. The following chart shows how volumes responded on the two XBX exchanges.
The five multi-exchange outage dates occur on or adjacent to four out of the five highest-volume periods of the year through Feb. 15. The inevitable conclusion: When investors want most to trade, some of the most liquid exchanges are unavailable.
Another thing this chart shows is how volume on crypto exchanges now surges when the price moves drastically in either direction. This is normal in traditional markets, but in crypto's 2017 bull market, volume tended to rise and fall with the price.
One factor that likely contributes to that market maturity is the increasing participation of institutional investors. Crypto exchanges like LMAX Digital are exclusively open to institutions and high-net-worth investors. Meanwhile, exchanges like Coinbase serve a mixed bag of retail and institutions. Days on which their volumes move differently may indicate days when one segment or another of the market is in control. Here’s a look at how that played out this year so far:
The chart shows each day's volume variance from the previous seven days' average volume. It's noteworthy how institutions' market activity, proxied here via LMAX Digital volume, records its largest increases (triple-digit percentages) at times when the bitcoin price rises across the $40,000 price threshold, as on Jan. 8 and again on Feb. 8.
Back to the Robinhood hearings. We heard Robinhood’s Tenev advocate for an end to T+2 settlement. However, as my colleague Noelle Acheson pointed out last summer, delayed settlement may be more a feature than a bug, when investors trade on credit and have capital committed elsewhere.
And that exposes another difference between traditional financial markets and crypto markets: Trading on credit is for the most part not available in crypto, representing a potential obstacle to institutional participation. In traditional markets, this may be the real "Robin Hood" problem because institutions trade on credit while retail investors must fund their brokerage accounts (and often wait days for a bank transfer to clear) before trading.
It's an issue that Robinhood the company attempts to address by allowing users to trade instantly on transfers of up to $10,000. In crypto, the equivalency is flipped: Offshore exchanges, where most institutions cannot trade, allow individuals to fund an account with bitcoin or the stablecoin tether and trade instantly in large amounts, often offering 100x margin and beyond. Whether that's responsible or not, the ways crypto exchanges are managing counterparty risk are innovative.
"Bitcoin fixes this" has become an ironic meme. How much more ironic if the centralized services, built to handle bitcoin, are where the seeds of market structure innovation are being nourished?
Clarification (Feb. 25): An earlier version of this article stated that LMAX Digital downtime data were not available. A clarification has been added to note that they are not available via Downdetector. Information from LMAX Digital’s website has been added to the article.
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