Price fragmentation is a growing issue in the crypto domain. It means that the low communication between crypto exchanges is causing significant price variations. The considerable differences in crypto prices on exchanges are causing the phenomenon of arbitrage investments. It means that investors look for different exchanges offering the lowest and highest rates on crypto, say Bitcoin. Then, they purchase Bitcoin from the exchange offering low rates, and sell to the exchange offering higher rates.
But perhaps the biggest concern that comes out of all this is that Bitcoin no longer stays a commodity. Since there are so many differences in prices, the cryptocurrency becomes nonfungible, causing the market to stagnate. As this continues to happen, the market moves away from commoditization, and it will eventually cause it to implode. Nevertheless, crypto enthusiasts can strive for change.
This brings us to market stabilization. Fortunately, all this chaos isn’t a new phenomenon, and it isn’t exclusive to the crypto market either. The equities and bonds markets had to grapple with a similar issue, but over time, regulation helped resolve it.
One example is that of the US Securities and Exchange Commission’s policy, which is referred to as NBBO. It stands for National Best Bid and Offer. Under this law, brokers are required to execute a trade at the best ask price available nationally when they’re buying a security. Similarly, when selling a security, they should get the best bid price available nationally.
Consequently, regulation can help stabilize the market, and protects investors from paying more at an exchange. Brokers will be kept in check, and the market forces everyone to cooperate instead of working for their own interests.
But since the crypto market is still in its initial stages, it lacks this phase of normalization. Crypto exchanges, as of yet, have the autonomy to operate as they please. And because the market is so fragmented, institutional and retail investors pay considerably different prices according to exchanges.
The solution seems simple. Just implement the same thing here, and all will be well. Unfortunately, there are various issues surrounding this. Dry liquidity pools, restrictive regulatory compliance, and slow communication are preventing meaningful change.
At this stage, Bitcoin has become a global asset, even more than Tesla or Apple stock. It’s unfair that investors can’t get the best prices at a time, as the NBBO has done for traditional equities. Luckily, more enterprise-grade liquidity and technology can enhance the digital asset market.
All these systematic changes could eventually promote a unified global trading market. Perhaps it can reach the same level as trading conventional stocks on the NYSE or NASDAQ. Without proper solutions to address fragmentation, arguments about trading fees don’t tell the whole story. It’s time to level the playing field for investors.