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Manipulation is not unique to crypto. It’s alive and well in stock markets, not to mention the Forex market. So why is the SEC so afraid of approving a Bitcoin ETF? And why is “manipulation” the main reason for not approving one?

While the SEC has not entirely ruled out cryptocurrencies, the virtual asset class appears to be just a little too exciting and volatile to receive approval in the near future. The Commission tends to prefer boring, iceberg-speed market movements — movements that are much less volatile and more difficult to manipulate.

Cryptocurrencies, on the other hand, tend to swing wildly, as evidenced by this month’s wild ride. For regulators, this represents a potential threat to investors, who can easily be lured in by the promises of quick gains. As SEC chairman Clayton said earlier this year:

Many kinds of manipulation occur, both in traditional markets and the nascent cryptocurrency market. Manipulative news, announcements of announcements, and FUD are used frequently to pump or dump prices to the benefit of those in the know.

Insider trading and front-running are rampant in both industries, as is spoofing, the practice of using fake buy or sell walls to coerce traders into certain patterns. And of course, wash trading is highly prevalent, although more so in crypto due to the plethora of small exchanges who want to impress CoinMarketCap readers with fake volumes.

All of these tools can be highly effective in both markets. So what’s going on that makes crypto uniquely problematic for regulators like the SEC?

The answer: Much, much lower liquidity.

Liquidity is essentially the ability to convert an asset to cash, or from cash into a given asset. The more liquid an asset is, the less volatile it tends to be, since orders can be filled without variation in prices.

Compared to the stock market, bitcoin is quite illiquid, and other cryptocurrencies are even less liquid than bitcoin. It’s a minuscule market in comparison. Think penny stocks, except with even lower liquidity and volume.

Why does liquidity matter so much?

The key problem is that one can influence the price of an illiquid asset much more easily, as in the case of a flash crash. A couple of months ago, a single buyer of $100 million of BTC caused an enormous upsurge in prices in a matter of minutes.

This is only possible with a relatively small, illiquid asset. While a $100 million purchase in the stock market would be significant, it would have nowhere near the impact of such a move in crypto’s tiny market.

The vast majority of trading occurs on a few major exchanges. Outside of the top ten or so exchanges with real volume, there’s very little genuine volume. And even fewer exchanges are used for “price discovery” on leveraged exchanges like BitMEX. So while crypto manipulation isn’t all that different from the stock market, price action happens much more quickly and has a far greater impact on prices.

Imagine a neighborhood where only a few homes are for sale. You might hope to sell your house for $200,000, if that’s the average value in your neighborhood. But if a similar property gets listed for only $180,000, it would hurt the value of the $200,000 homes as they instantly feel more expensive.

In a more populated neighborhood, prices are not heavily affected by a single cheap home. The larger market is more liquid, and therefore, more stable.

The crypto market is like a small town with only a handful of properties for sale. Add one or two more homes, and the average price moves rapidly. This makes cryptocurrency markets far less predictable, far easier to manipulate, and far more volatile.

The nascence of the crypto industry is both a help and a hindrance. Volatility isn’t all bad,: it just feels scary when prices go down. Nobody complains about volatility when prices are heading up.

Over the next few years, as the market grows, liquidity will increase and make cryptocurrencies more stable and predictable. Then crypto might just be boring enough for the SEC to finally approve it.