For most investors, exchanges are the best and only way to trade cryptocurrencies. But if you are a wealthy investor and want to buy large amounts of tokens without affecting the prices too much, you head to a dark pool.

Dark pools are privately organised exchanges that allow institutional investors and wealthy individuals to buy and sell cryptos without exposing their trades.

This is because mainstream exchanges operate using a public order book. Therefore, if such large transactions occurred on a centralised or decentralised exchange, they might cause panic or excitement within the market and influence the price of the asset in question.

Dark pools were developed as a solution to this problem. They resulted from block trading — where large buy/sell orders are privately negotiated — so that investors could carry out such trades without impacting the market.

Dark pools are common in the traditional markets and are steadily gaining popularity in the cryptosphere. However, they are a vastly misunderstood part of the financial market — for starters, they have nothing to do with the black market or dark web. Dark pools are simply trading venues that do not make the bids or offers public; they are always hidden.

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Therefore, the word ‘dark’ must not be construed in a negative light. It only implies the obfuscation of bids and offers. Plus, these pools make trade reports, albeit they are the bare minimum required by law.

Are they good for retail investors?

Dark pools are certainly good for institutional investors. And since these investors are mutual funds and ETFs, they may be good for retail investors as well. Plus, if orders of such sizes were executed in the open market, the consequences could be massive. From this point of view, dark pools prevent unnecessary volatility — which helps the crypto market immensely, considering how volatile these digital assets already are.

How can dark pools help retail investors?

While dark pool investing is becoming less private these days, it is not meant for retail investors. There is very little chance that a retail trader can cause a significant shift in the market. Unless you manage a considerable portfolio, those chances are significantly low. So, retail investors have little use for secrecy and privacy. And even if retail investors were to trade in these pools, there are chances they could expose themselves to risks.

Here are some of the risks associated with dark pool trading:

1. Inaccurate prices: While dark pools align their prices with the rates available in the crypto exchanges, they typically act in advance of the market. Plus, since the lot sizes are massive, you could see swings you are not used to and were not expecting.

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2. Information asymmetry: Dark pools comprise institutional investors who have more knowledge and experience of the markets than an average retail investor. Such investors are usually involved in policy decisions and have more insight in matter of trading. This means that if you trade in such a market, you can be profitable if you have access to that kind of data and insights; if not, you are inviting trouble for your portfolio.

If you still want to invest in dark pools, do so via a financial advisor. Also, remember, not all dark pools are the same — sometimes, the only similarity between two dark pools is secrecy. Otherwise, they all could have different conditions and rules, which makes it all the more difficult to work in tandem with them.