Is asymmetric information driving crypto’s wild price swings?

It has long been believed that investors possessing inside knowledge help drive cryptocurrencies’ price volatility, and a number of academic papers have been published on this topic. This is why Coinbase’s intention to regularly publish in advance a catalog of tokens being assessed for listing on its prominent trading platform is noteworthy. 

Coinbase’s plans, announced in an April 11 blog along with 50 crypto projects “under consideration” for Q2 2022, could help tamp down the pervasive speculation that surrounds small-cap tokens. Meanwhile, this can help alleviate industry concerns about “information asymmetry,” which typically occurs when one party to a transaction — a seller, for instance — is much better informed than another transactional party, such as a buyer.

Last week’s pre-list, which included 45 ERC-20 tokens on the Ethereum blockchain network and five SPL tokens on the Solana network as well as future token lists, is meant to “increase transparency by providing as much information symmetry as possible,” the United States’s largest crypto exchange explained.

Will it really smooth out the crypto-investor playing field, though? “It can be a step in the right direction,” Lennart Ante, co-founder at Blockchain Research Lab gGmbH and author of a research paper on information asymmetry in Bitcoin (BTC) transactions, told Cointelegraph. “In theory, this reduces information asymmetry and, thus, the price effect at the time of the listing.”

“More transparency is always welcome, obviously,” Daniele Bianchi, associate professor in finance at the School of Economics and Finance of Queen Mary University of London, who has published research on crypto price swings, told Cointelegraph. That said, “information asymmetries and adverse selection are still pervasive in cryptocurrency markets,” and that isn’t likely to change anytime soon. 

Indeed, a mere day after Coinbase’s listing announcement, reports surfaced on Crypto Twitter that one crypto wallet holder, possibly an insider, probably had pre-knowledge of Coinbase’s new listing candidates, and may have made a tidy profit trading on some of those tokens. According to crypto influencer Cobie:

“Found an ETH address that bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published, rofl.” 

New distortions from institutional investors?

Be that as it may, Coinbase’s announcement serves as a reminder that the industry continues to struggle with the problem of asymmetric, or unbalanced, information and it raises questions. 

Are information asymmetries really driving huge price swings in cryptocurrencies, as commonly believed? If so, is this undermining investor confidence in the system? If something is amiss, what might help fix things? And, what about Coinbase’s recent announcement, isn’t this an encouraging move on the part of an acknowledged industry heavyweight?

Information asymmetry is a real crypto sector problem, driven by relatively low market capitalization, a concentrated ownership structure and a highly fragmented and multi-platform market structure, said Bianchi. Moreover, it’s no longer just “whales” and crypto miners who may be manipulating markets, he told Cointelegraph:

“The investment landscape is changing and more institutional investors — either specialized or multiasset — are coming into the marketplace. In other words, there is a new type of sheriff in town with the potential to benefit from naïve retail investors.”

The low liquidity level of many crypto projects makes them vulnerable to price manipulation, added Bianchi. “Liquidity is key here. Outside of the top 100 by market capitalization, a trade of a few million USD can easily generate significant price swings at the expense of retail traders who typically have poor market timing skills.”

Some others concur. “The cryptocurrency market is, in fact, the…