Let’s say you owned 20 thousand bitcoin, worth around $600,000,000 and like most investors during a bear market, you wanted to sell off all of it to fund your next set of real estate investments. Selling 20 thousand individual bitcoins would cause a mass market movement, so instead you go ahead and register for what is called a “dark pool” so you can sell your shares in privacy and not have such an immediate drastic effect on the market.
Let’s dig in.
What is a Dark Pool?
When they hear the word “Dark Pool”, they feel some uneasy way about investors taking advantage of the market, but when we heard about them they piqued our interest.
You see, the story we used in the beginning of the video is exactly what a dark pool is. Dark Pools are a platform that’s used to hide large transactions from the general public, this can be used to avoid slippage, to avoid causing prices to plummet, avoid the fear that comes from a whale selling, or just to get an average price for a large number of crypto.
Let’s go over each of these benefits real quick, before explaining exactly how they work:
1) Avoid Slippage
Slippage is the term for what happens when you put in an order to sell a bitcoin for $35,000, but it actually sells for $34,980. To make sure it sold immediately, you have to have some “give” and this “give” is also called slippage. The more crypto you are buying or selling, the more slippage you will have to be comfortable with.
2) Avoid causing prices to plummet
When you dump a bunch of crypto back into the market, you can effectively change the price of crypto. Due to how supply and demand works, when you add more supply, the demand drops… and when the depend drops… so does the price.
3) Fear of a whale selling
Blockchains are really cool technology, but most of them are open for everyone’s eyes to see. This means any large wallet holder is constantly under the eye of professional traders. If they see a whale dumping their coins, they may get scared that the whale knows something they don’t and follow suit to crash the price even more. Dark Pools are a great way to hide trades.
4) Get an average price
Some dark pools allow traders to walk in and say “I have 20,000 bitcoins to sell, and I want a guaranteed price for them all, what can you give me?” Then the dark pool will return a price they can afford, and that will allow the seller to know exactly how much they can actually sell for, instead of guessing how much they may be worth.
How does a dark pool work in crypto?
Dark pools work in an interesting way, they are usually for large investment portfolios that are selling a large amount of crypto each and every day. Let’s use the platform Kraken for example, Kraken actually has a specific dark pool where they have buyers and sellers committing to a certain amount of eth or btc, for the kraken dark pool, the requirements are currently it’s $100k of btc and $50k of eth.
Most dark pools use limit orders compared to market orders. These are technical terms which come from the Traditional Finance world. If you’ve played Runescape before, a limit order is like the grand exchange, you set the price you want and maybe it will be filled, but maybe not, however you get to determine the price at which it sells, just not the time.
Market orders, on the other hand, look at all the limit orders out there, and then interact with the orders already out there to create instantaneous trades with a little price difference. This way you get an instant trade, but you pay a little slippage, which we went over earlier.
Either way, you get to choose 1 variable. Limit orders allow you to pick the price, Market orders allow you to pick the time. Most dark pools use Limit Orders so the seller can ensure they make a certain amount from each trade, even if the trade takes a month to complete.
Are dark pools bad?
This is the part where many people have an issue, they don’t really know if dark pools are really good or bad for average investors like us? In fact, in traditional finance, dark pools are only available to people with a large, large amount of money… so it automatically feels secretive and cultish. However, we are an educational and entertainment channel, so we want to help you understand the pros and cons of them just a little more.
One of the main issues people have is that these investors are trying to be secretive with their money, which actually is one of the benefits of using a blockchain: staying anonymous. However, some people believe since whales have a lot of power, they should be careful with that power and use it responsibly. In the end, they are simply investors like us, just trying to make a profit or advance a project.
Market Manipulation is probably the largest concern investors have when they first hear about dark pools. “Can’t they crash the price? Can they spike it too?” Well, in fact, that is one of the reasons these investors are using a dark pool, they want to trade their crypto without causing huge price volatilities. Nevertheless, moving large amounts of money can always cause price volatility, so the option to come back in as a non-anonymous user and buy a bunch to cause a price spike is still there.
Dark pools are complicated yet beautiful applications within the crypto world but we don’t want to decide that for everyone. What do you think about dark pools? Should they be there or should they be taken away? I’m not even sure if we could even take them away based on how they work.