The Hidden Factors Behind Crypto Market Volatility
Crypto markets are notorious for their unpredictability. For years, factors such as speculation, low liquidity, and hype cycles have been cited as reasons for the erratic pricing of altcoins—those digital currencies that are not Bitcoin, Ethereum, or Solana. However, a less visible force also plays a significant role: private market-making agreements. These arrangements can dictate which tokens succeed and which ones fail, and historically, the number of failures has outnumbered the successes.
Wall Street’s Growing Involvement in Crypto
Recently, Wall Street firms have ramped up their investments in the cryptocurrency sector, diversifying their portfolios with increasingly unconventional assets and incorporating them into corporate treasuries. Notably, companies like MicroStrategy and Metaplanet have accumulated substantial holdings, amounting to approximately $73 billion and $2 billion, respectively, joining a growing list of corporations entering the crypto space. These entities are navigating markets that lack clear rules and oversight, relying instead on obscure off-chain contracts. A failure to grasp the intricacies of crypto market-making could lead to distorted valuations, misguided investors, and a potential backlash affecting both Web3 and traditional finance.
Understanding the Role of Market Makers
Many assume that the volatility of altcoins is due to their lack of liquidity or weak foundational principles, which is partially accurate. However, a critical aspect often overlooked is the role of market makers—firms tasked with ensuring there is sufficient liquidity for buying and selling these tokens. In contrast to their traditional financial counterparts, crypto market makers operate with minimal regulatory oversight. Their agreements are not publicly disclosed, lacking standardized reporting, audit trails, or any governing body to ensure accountability.
Insights from a Market-Making Perspective
Having worked in market-making roles at leading global crypto exchanges like AscendEx and Gemini, I have witnessed firsthand the dynamics at play. As the head of FBG Capital, a significant market-making firm, and now leading Forgd—a platform designed to assist token projects in assessing market maker performance and negotiating favorable terms—I’ve observed that many token creators are primarily builders. They often lack the financial acumen necessary to fully comprehend these contracts and the risks they pose when incentives are misaligned. This lack of understanding can result in one-sided agreements masquerading as liquidity solutions, ultimately leaving projects vulnerable and misleading retail investors.
The Risks of “Loan + Call Option” Agreements
One of the most prevalent and concerning structures in these arrangements is the “loan + call option” agreement. In this scenario, a token project lends its cryptocurrency to a market maker, who commits to providing liquidity. In exchange, the market maker receives call options, granting them the right—but not the obligation—to repay the token loans in U.S. dollars at a predetermined strike price. If the token’s value rises, the market maker profits by purchasing tokens at a discount and selling them during the upswing. Conversely, even if the token price declines, the market maker can still profit by selling the borrowed tokens prematurely, withdrawing support, or even shorting the asset. This leaves the project in a precarious position while the market maker walks away with gains.
The Lack of Protections in Crypto Markets
If such practices were to occur in traditional equity markets, they would likely spark outrage. Imagine a company going public on the NYSE while an undisclosed private actor has a secret agreement to sell off discounted shares—without any public disclosure. Traditional equity markets have safeguards in place to prevent such manipulation. The Securities Exchange Act of 1934 outlines clear regulations designed to safeguard against market manipulation during public offerings, while Regulation M and Rule 10b-18 provide protections for stock buybacks and stabilization activities.
The Implications of Growing Institutional Interest
Today, the trend is shifting as not only crypto-native funds or individual investors are acquiring these assets; mainstream firms and institutional investors are beginning to include altcoins in their portfolios, often without a complete understanding of the underlying market mechanics. This trend poses significant risks. When token prices are influenced by off-chain agreements that lack transparency, it jeopardizes the integrity of the asset and misguides potential investors. The market may appear fundamentally sound, while its stability is underpinned by short-term maneuvers and opaque incentives.
The Need for Transparency in Crypto Market Agreements
If left unchecked, these practices could tarnish the reputation of digital assets at a time when they are finally gaining mainstream acceptance. Furthermore, it could lead to regulatory scrutiny and potential backlash from shareholders if companies incur losses linked to undisclosed risks. To foster the maturation of crypto into a credible investment class, it is essential to bring these agreements into the light. Founders must have access to tools that allow them to evaluate proposed deals, simulate various scenarios, and negotiate informed terms. Regulators, fund managers, and institutional investors should demand basic transparency before engaging with new assets.
Establishing Industry Standards for Market-Making Agreements
At a minimum, every market-making agreement should include standardized disclosures that clarify the structure governing liquidity. These disclosures should specify whether call options are part of the agreement, outline strike prices and loan durations, and describe any hedging policies that could affect token performance. Without this level of transparency, both investors and project teams are left to navigate a landscape shrouded in uncertainty, lacking a clear understanding of the factors influencing token markets.
The Importance of Accountability in the Crypto Space
These are essential requirements. Without them, we are asking sophisticated firms to engage in a risky environment without adequate information, which in turn exposes retail investors to unforeseen dangers. If digital assets are to be integrated into the balance sheets of publicly traded companies, the governing rules surrounding those assets cannot remain hidden behind confidentiality agreements. They require transparency, structure, and oversight. Failing to achieve this risks introducing the most problematic elements of the crypto landscape into mainstream finance, leading to regrettable consequences that could have been avoided.
