Crypto Trading

Dark Pools

Today we are going to take a look at a scary sounding place that crypto trading happens, the dark pool. While having an ominous name, there are actually quite a few legitimate reasons that these “private sale” places happen, and some of them are even doing it to specifically protect everyone else’s investment, so it’s a pretty good topic to understand, especially if, unlike me, you are dealing with large quantities of crypto.

For the usual disclosure, I am not a financial advisor, I don’t even work in finance at all. My day job is as a telecommunications software engineer. Treat everything you read here as some educational resources and not financial advice.

What Are Dark Pools

A dark pool is simply a place where trading happens, that is out of the eyes of the public. Most trading happens on an exchange, be it a centralized exchange, or using swaps through a decentralized one, and they are all happening pretty out in the open. For a dark pool, it’s more of a private sale, sure, it can be tracked through the blockchain ledger like any other transaction, but when it doesn’t go through an exchange, it has a different impact than one that does.

There are a few reasons that people might want to use a dark pool, some of them for shady reasons, like avoid taxes, but we are not going to look at those, because really, crypto is not as full of criminality as the media has portrayed, and I think that by focusing on the good uses of these, we can help end some of the bad feelings terms like “dark pool” may elicit.

Some large exchanges even operate their own dark pools, but they tend to have very large minimum orders, into the tens and even hundreds of thousands of dollars as a floor to get in.

Avoiding The Whale-Sell Fear / Impacting Price

I’m going to combine these two items together, because really, they go hand in hand. When a whale moves a large amount of crypto onto an exchange, two things are likely to happen. First, that whale is going to sell off that large position, and depending on just how big it is, will likely have a pretty significant effect on the price.

If someone sells off say $100 million in Bitcoin on Binance, that is going to have a pretty good downward push on the price, which of course will kick arbitrage in and balance that out across the markets.

That would already be bad enough, but when a whale moves that much money, first, the whale watching accounts are going to flag that transaction moving onto the exchange, and then the price drop itself afterwards, tends to cause the market to have a little bit of a panic, causing more people to sell, which snowballs out, probably throw in some liquidations on the way down, and suddenly we have a much more significant price movement.

Now, if the same transaction were completed through a dark pool, well the whale watchers would see the large wallet to wallet transfer, might set off a few alarms, but not nearly as many as if it went to an exchange wallet. Couple that with the fact that there was no major price movement as a result of the sale, it has a much lesser effect across the whole market. Some people might get a little antsy seeing the whale transfer the crypto, but it doesn’t cause a big panic sell.

Some dark wallets will even allow you to just trade your hardware wallet directly and not have any transactions show up at all, but I’d personally not want to be on the receiving end of that, because then you have to trust the other person is not just going to restore the seed phrase and drain the wallet before you have a chance to, so of course, I wouldn’t recommend this specific method myself.

To use a very overused super hero quote, because it very much applies here – With great power comes great responsibility. Whales are a necessary evil. They catch a lot of flak, but really, if it wasn’t for people with big money being in the crypto game, all our Bitcoins would still be worth $30 and we’d be debating the usefulness of it in dark forums in the shady corners of the internet still, instead of in the news and with institutional involvement.

They are a necessity, they are the reason crypto is worth the market cap that it is. Some of them recognize the power they have over the market, and the responsible ones will often try and avoid causing unnecessary grief for the rest of us, because they decided to cash out and take some profit.

Getting A Guaranteed Price

Another big reason that people will use a dark pool is to get a set price for their crypto and avoid any kind of slippage. Yes, normally slippage is a term that gets thrown around when talking about decentralized exchanges, but it does happen on the big centralized ones as well, especially when you are dealing with a very large order. Just take a look at the order book on Binance for any of the major cryptos and look at all the buy orders. Now imagine you are trying to sell $100 million of that crypto, how many of those buy orders would you have to rip through to sell off your position, and how far down in price do you have to be willing to go.

On the flip side, you could set a limit order and let it slowly get filled as people are willing to buy at your price, but you would be basically setting up a huge sell wall, that would go back to the first point about striking some fear into people. Is someone really going to be willing to buy say $100,000 worth of Bitcoin, if they know that another $99,900,000 needs to sell at the price they are buying it at before it has a chance to go up from there? Not very likely.

Now, if you run your order through a dark pool, you can either negotiate a price to move the entire stack at once, or you can negotiate a price that you sell at over time, all the while keeping the rest of the market moving while you get your price fulfilled. Now of course, this can work against you, if you negotiate your price and you’re having it filled over time and there is a massive rally and the price shoots way up, your order will sure get filled quicker, as it will be basically on sale, but you’ll still get your negotiated price, so it’s not a perfect system either.

Conclusions

As you can see, while dark pools do have some shady uses, they are actually very useful in protecting both a large investors ability to move their crypto easily and with set prices, as well as protect the market from a whale who is making a large sale.

While these pools are not something I’ll have to worry about using myself anytime soon (give me a couple of years of investing), it’s definitely something I’m glad is out there, lurking, in the darkness.

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Want some more content right now? Check out some of my previous posts:

Arbitrage
Poly Network Hack
Rug Pulls

A few referral links, in case you are interested in the service, and it also helps me out.

Binance – large centralized exchange – referral link saves you 10% on trading fees
Coinbase – basic crypto exchange – referral link gets you bonus crypto on first deposit
Cointiply – very good crypto faucet and earning site – no bonus for you on this referral unfortunately