Just when the markets started getting complacent about their recent gains the crypto market took a rather sudden and unexpected dive.
Bitcoin fell 6.3% in under five minutes logging it’s 5th largest hourly drop ever.
We can’t say that this was necessarily unexpected by all though. Here’s an article that was written shortly before the plunge…
Whenever a large platform goes down we have the potential for big moves. The crypto market is already quite small and the reason it’s so volatile is the still maturing market lacks significant liquidity. Yesterday we had a twofer. Both Binance and Coinbase went down at the same time for some unscheduled maintenance.
So, with two of the main providers of liquidity offline it was simply a matter of a single or several large orders that can easily dump the market. That may have come from unknown or known whales, a large auction carried out by the US Government, or as some are speculating, the platforms themselves. But there’s certainly no conclusive evidence of that… yet.
There are more than 100 responses on my twitter feed trying to explain it. Some of them are actually serious too. But it’s the liquidity issue that I’d like to explore deeper.
Short on Liquidity
Many digital asset whale watchers were quick to note the recent actions from the crypto market’s main treasury. Several hours before the dual-downtimes a total of $60 million worth of Tether was minted. The CTO of Tether & Bitfinex was quick to assure us that these were simply being added to the reserves and had not been deployed as of yet.
Speculation runs high that the main recipient will likely be none other than Binance. It seems their new high leverage products are not only extremely dangerous for retail traders but they’ve been sucking up scads of liquidity from a market that is already in short supply.
Last week, while bitcoin was pushing $10,300 and rising there were several reports that Binance was running short on Tether to lend out.
Now, I certainly don’t have any behind the curtains view of this market and am just a simple observer like the rest of us. However, all this money minting in the name of liquidity padding strikes an awful resemblance to what the US Federal Reserve is currently doing in the repo market, which coincidentally enough we discussed at length in yesterday’s column.
If this is really the path that the crypto market is headed down then I want no part of it. We should be working hard to create a better market, not emulating the old broken one. The idea of bitcoin introduced the concept of ‘digital scarcity’ that for the first time, an asset on the internet can be impervious to artificial inflation. But now, we can see that the market that has been built around it is very much heading down a path of greed, and that never ends well.
Bitcoin’s price rose by 30% in the month of January. That should be more than enough movement for any trader to be happy with. So why are so many rushing to leverage it?!
Too much leverage always leads to asset bubbles, price manipulation and liquidations. It’s a huge roadblock to true price discovery and any gains will eventually be undone. I submit to you a graph of gold who went through this exact cycle about one decade ago. The deleveraging cycle there went from the beginning of 2012 all the way through the end of 2015 and is only now seeing a real recovery, no thanks to over-printing from the Fed.
Well, the channel we were tracking on bitcoin is toast. Yesterday’s huge red candle has taken us well below the line and at this point it would take a rather sizable reverse-Bart to bring us back on track…
Problem is, it might be a bit too soon to start trying to draw lines on the long term chart as we can probably expect some further volatility from here. Leaving the technical on the side for a moment and the speculative market, I did want to end this piece on an optimistic note.
Here’s a long term graph of the actual volumes on the bitcoin blockchain. As you can see, we’ve come a long way.
Perhaps tomorrow we can go into some of the other fundamentals that make me very optimistic about this space but for now, this note is already very late and for that I apologize.
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