Information asymmetry and practices of front-running are migrating from token markets to institutional products, particularly Digital Asset Treasuries (DATs). Shane Molidor, the CEO of Forgd, highlighted this developing trend that sees investors leveraging insider knowledge about impending corporate crypto purchases.

Molidor elaborated that this issue is not limited to just a few individuals. He identifies these kinds of insider-style behaviors as a deeply ingrained aspect of crypto markets, where market prices frequently deviate significantly from their inherent value.

From experience across both Western and Asian trading environments, Molidor noted that many crypto institutions still regard regulatory measures as secondary to their operations. “In the West, it’s about seeking permission rather than asking for forgiveness,” he remarked. “In the East, the focus is on rapid gains with scant regard for future repercussions.”

Before founding Forgd, Molidor held key positions at crypto exchanges like AscendEX and Gemini, operated by the Winklevoss twins. His career also includes significant trading experience in China working with FBG Capital. Forgd brands itself as a Web3 investment bank, providing guidance on aspects like tokenomics, market maker relations, and exchange listings.

As DATs gather pace, the market tendencies that prompted insider behavior in token trading are now appearing in institutional offerings. “Even minimal buy-side demand can create substantial market movements when asset liquidity is low,” he cautioned. “It’s a positive feedback loop — until it swings the other way.”

Understanding Crypto’s Engineered Launches

Molidor argues that new token listings in the cryptocurrency arena often value flash over fair market discovery. Various stakeholders involved in the listing, such as exchanges, market makers, and token issuers, operate primarily for profit, which influences how new digital assets are presented to the retail audience.

Crypto exchanges can set lower prices initially and maintain thin liquidity; thus, even small bulks of purchases by retail investors can lift asset prices significantly. “They’re incentivized to curate an upward trajectory for prices,” he said, discussing strategies such as underpricing tokens during their initial offering or maintaining lower liquidity levels.

Molidor pointed out that retail investors often take early price surges as indicators of strength, not realizing that it’s their buying pressure that is amplifying the price hike. “Everyone feels they are securing a fair price, but they aren’t. They are purchasing at all-time highs, leading to a subpar user experience later on.”

The cycle predominantly favors exchanges; each asset listing generates fresh trading volume and media exposure, even if market prices subsequently plummet. Molidor referred to this dynamic as a mere marketing strategy. He noted, “Exchanges often flaunt that the new asset you were given early access to is now traded at many times its original price, but fair price discovery at launch was absent.”

Emerging Market Tricks in Crypto Treasuries

The characteristics of insider trading have entered the domain of DATs, which refer to companies purchasing cryptocurrencies to enhance their balance sheets. Molidor pointed out that after starting with well-established assets like Bitcoin, DATs now seek smaller, less liquid tokens hoping for higher returns. This creates susceptibility to market manipulation.

In the fundraising fabric of treasury assets, there’s an opportunity for front-running. Insiders may gain access to advance knowledge about which tokens will be acquired, enabling them to purchase these assets preemptively on the secondary market, anticipating future price gains.

“Our findings with DATs indicate that the implicit aim is often to cause enough market disturbance in the underlying asset to promote noticeable price appreciation. This, in turn, triggers FOMO among speculative traders, further driving up prices.”

Yet, this reciprocal influence can have adverse effects. When the buying momentum declines, the same thin liquidity that inflated prices can lead to a rapid fall instead. With minimal disclosure requirements and scant connection to actual fundamentals, price emerges as the exclusive determinant of value, which can easily be skewed.

Molidor remarked on the nature of corporate cryptocurrency buys moving markets, recalling instances from 2020-2021 when major companies like Tesla and MicroStrategy first incorporated Bitcoin into their financial holdings — causing markets to react sharply due to lower liquidity and heightened sentiment.

Today, Bitcoin is far less reactive due to its deep liquidity, meaning such news now has a muted market impact. According to Molidor, the favorable feedback loops are now vividly observable in smaller, less liquid assets still notably sensitive to treasury or fund acquisitions.

Intricacies of Insider Dynamics

The blurry boundary between token exchanges and institutional products showcases how speculation and information asymmetry remain integral to crypto’s systems. Molidor believes resolving these issues will require better synchronization between blockchain creators, exchanges, and the now-growing institutional participation in the crypto space. He noted that most token projects tend to emerge with “exceptional technology but understand market strategy poorly,” while many institutional players misinterpret the mechanics of crypto markets.

Molidor summarized: “Both parties often misunderstand each other. Founders struggle to operate in financial environments, while institutions lack comprehension of how crypto markets function.”

While the influx of institutional funds could legitimize crypto in traditional finance, it might also introduce new vulnerabilities into a system still grappling with transparency challenges. The subsequent evolution of the market will determine if stakeholders can move beyond the current model.

“Investors are now exposed to something that they might not entirely comprehend. The moment prices realign with their true value, the consequences of such misunderstandings will be stark.”

Further Reading: Rise of Crypto-based Corporate Strategies