What Is A Conflict Of Interest In Crypto Investing?
A conflict of interest occurs when a company, platform, or organization benefits from outcomes that may not align with investors’ best interests. In other words, the two entities are competing rather than aligned in purpose and desired outcome.
A Dangerous Dynamic In Crypto Investing: Psychology, Risk & Market Behavior
This dynamic exists everywhere in the world of finance and business. Unfortunately, it is a real threat to succeeding in any aspect of life, not only in crypto and finance. Before I continue, I will say that a conflict of interest can exist without being exploited. For instance, one of the largest industries in the world operates on a foundation of conflict of interest: the health industry. In other words, if you benefit, they cease to benefit.
When you are no longer ill or being medicated, their revenue from you will cease. In the same way, when you need constant medication and treatment, their revenue stream continues to flow. As I said, just because it exists does not necessarily imply that it will be exploited. Obviously, in industries less critical to human survival, it becomes very easy for many to choose gain over ethics. Being aware of this dynamic is important.
What Is The Ideal Business Model? Principles Of Sustainable Value Creation
To be clear, I am simply highlighting where this dynamic could exist, not making any assertions about who may or may not be exploiting it. Being aware of this truth will help one process data and information with increased scrutiny and generally aid in making good decisions. An ideal business model satisfies both the customer and the business, providing the service. There is no conflict of interest, but rather the constant pursuit of a particular solution to a need.
How Crypto Exchanges Create Conflicts Of Interest: What Every Investor Should Know
Many trading platforms, especially leverage-based platforms, are directly positioned against the client. In other words, if you open a long position, the platform is short. If your trade is successful and you realize a profit, the platform incurs a loss. If you win, they lose, and that dynamic cannot be changed. For this reason, I never consume analysis from any trading entity that offers signals and free insights. It is not in their best interests for me to succeed, so I cannot trust their data.
Provided it is not biased, I am not in a position to know that and would therefore rather avoid it altogether. You are not going to see this dynamic on the spot market, as the platform is merely facilitating a transaction between two entities and is not actually exposed. This might be important information for those new to trading who have perhaps not considered where their profits actually come from. This is why liquidation events will always occur in any market!
Without liquidation events, exchanges would remain on the wrong side of the market in a bull run and vice versa. This is why even in prolonged market directions, whether bullish or bearish, there are short-lived deviations. A bear market rally often appears convincing, only to collapse swiftly, erasing any gains made during the rally. Locking in and securing gains from time to time, regardless of the market, is the smart move.
Why Is Awareness Important In Crypto Investing?
Being able to discern a conflict of interest will ultimately inspire sober judgment and assist in seeking out the best and most accurate data. This is just another prime example of why doing your own research is absolutely imperative. Machinations and conspiracies aside, unless you understand the model’s dynamics, you will not be able to process the data accurately. Something that actually surprised me in recent days was the response of crypto exchange CEOs discouraging users from holding funds on centralized exchanges.
This would be the equivalent of banks identifying a potential threat and advising account holders to withdraw their funds. I don’t think that will ever happen! It seems there is still some integrity in the crypto market, contrary to popular belief. Some points work in exchanges’ favor, but the reality is that there is more to lose if clients choose to hold their own funds and alternatively utilize DEXs and self-custody solutions such as hardware wallets.
How Does Crypto Level The Playing Field For Investors?
This is why I enjoy the idea of the incentivized economy and earning crypto on numerous platforms and opportunities. The upper hand is brought lower into a dynamic where everyone wins, and not just a single party. People who partake in this incentivized structure earn crypto; in some cases, those who refer them also earn crypto. The platform grows, becomes stronger, and earns even more income. Everyone gets a piece of the pie.
Therefore, everyone is united around a single goal, unlike many business models. As mentioned before, a good business model leaves the service provider and the customer happy. Decentralized Web3 protocols are better positioned to fulfill this objective. Platforms like Hive and Arena are good examples of this dynamic within the SocialFi sector. However, even these models require tweaking to secure better token performance.
Why Decentralization Is The Better Way Forward For Investors
At the end of the day, the more we can purify decentralization, the more we will benefit from an essentially fairer structure. In reality, decentralization still has a way to go in terms of maturation and perfection. This will, however, require time and further innovation. Sadly, one can already see how decentralization is being attacked, and we can only hope that, as Bitcoin survived numerous attacks, decentralization will be equally resilient.
How To Avoid Crypto Conflicts Of Interest Using Decentralized Solutions
As mentioned earlier, Arena and Hive are great SocialFi alternatives to legacy platforms such as X and Medium. When it comes to trading, users can opt for decentralized exchanges (DEXs) such as Jupiter and Uniswap. For more extensive contracts, traders can use Aster and Hyperliquid. When it comes to custody of your assets, popular hardware wallets such as Trezor and Tangem are good options to explore.
When purchasing directly from Tangem, use the code WK6ZP4 to qualify for a 10% discount. Decentralized alternatives for earning yield on platforms such as Nexo can be achieved by utilizing various DeFi protocols. It is important to note the risks in the DeFi sector, including impermanent loss, hacks, and smart contract exploits. Some users might opt for centralized solutions, at least until decentralized alternatives become more robust against attacks.
Final Thoughts
There are situations where a conflict of interest cannot be avoided. However, where possible, it is advisable to use decentralized alternatives, or at least services that do not necessarily have a direct conflict of interest with the user or investor. This can be difficult at times. However, understanding how an entity operates is imperative, especially if you are going to invest significant capital in its infrastructure and services.
Decentralization does provide better conditions for users and investors. However, the safety aspect, such as protection against hacks and exploits, is often inferior to that of larger, well-established entities. At this stage in the Web3 journey, it’s a bit of a trade-off. Investors and participants must decide which is more important to them: safety or better conditions. Web3 and decentralization still require significant maturation and development. Use these protocols wisely.
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