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There are two Bitcoin markets. One is dominated by regulated exchanges and traditional brokers and attracts investors who buy Bitcoin through their PayPal or Robinhood accounts. People in this first market mainly bet on the rise of Bitcoin and plan to hold it for an extended period.
The other market largely exists on unregulated exchanges where traders use derivatives, employ huge leverage, and are often agnostic about the direction of Bitcoin: you can earn as much when it goes down as it does when it goes up. Many trade using futures contracts known as perpetual swaps.
On days of high volatility, the second market is 20 times larger than the first, according to Joshua Lim, head of derivatives at Genesis Global Trading, which helps investors trade, hold and borrow cryptos. And on days like Wednesday, when Bitcoin has fallen 40% in 12 hours to a low of $ 30,200, that second market can turn a decline into a rout.
The sale didn’t just hit Bitcoin at its lowest, the crypto market lost nearly $ 1 trillion, with searing assets like Ether and Dogecoin falling even more than Bitcoin.
The derivative coin, although it is a more recent development at least on the volume scale it is now, is the main driver of the major sell-off type moves in crypto, Lim told Barrons.
Bitcoin rebounded to over $ 40,000 in less than a day, but recently faltered to around $ 38,000.
Casual crypto investors should take note. The public listing of Coinbase Global shares (ticker: COIN) has helped boost cryptocurrencies for months, but now there is a void in the news and volatility is a historically dangerous condition for Bitcoin. And some players are starting to come out. For the first time in months, there is evidence that professional investors have shifted their crypto assets to gold, according to JP Morgan.
Big positive events have already led to similar trading patterns in crypto. In 2017, the market started to sell after the launch of Bitcoin futures and has not recovered for years. This time around, the crypto investor base is much deeper and institutions started to buy seriously when prices hit $ 30,000. Support at these levels appears strong. But some people in derivatives trading don’t think the weakness is completely over.
Justin dAnethan, director of sales at EQUOS, a derivatives-focused cryptocurrency exchange owned by Nasdaq-listed company Diginex (EQOS), now sees anxious energy in the crypto markets. I think it might be the calm before the storm, and we might see another pullback around 30K, he said. I don’t think lower than that.
The combination of low liquidity in the cash market and high leverage means that Bitcoin is just as volatile as it was five years ago, even though it is 100 times more valuable than it was. it was then an almost unknown phenomenon in other markets. In general, an asset becomes less volatile as its value increases and its investor base expands.
That’s why Nicholas Colas, co-founder of research firm DataTrek, recommends a position size that recognizes that this is a $ 750 billion asset that still trades as if it were with assets of $ 1 billion.
For months, the crypto market swelled as traders anticipated the listing of Coinbases on the Nasdaq and bet on new use cases such as non-fungible tokens and decentralized finance. Bitcoin rose steadily from $ 10,000 to $ 60,000 between October and April.
The climb was relatively gentle, Lim notes. What many people have forgotten is that crypto is prone to these massive withdrawals and liquidations due to the triggering of leverage.
At EQUOS, traders can leverage up to 125 times, although the exchange limits the dollar amount of leveraged bets to $ 10,000.
The thing we want to avoid … are people taking massive bets with leverage that they can’t handle, says dAnethan. He’s based in Hong Kong and says a lot of derivatives trading takes place in Asia, which means the craziest crypto moves can happen when US traders are asleep.
Massive sales can trigger margin calls that induce even more sales which several traders have called a cascading effect in interviews.
There is debate over the direct cause of the Wednesday sale, but sentiment had been negative for several days after Tesla CEO Elon Musk announced that the company would no longer accept Bitcoin as a payment method because it helps. to climate change.
China’s growing crackdown on crypto activity this month also hurt sentiment.
The massive sell-off exposes the volatile dynamics of the crypto market. But it’s worth remembering that crypto has already overcome these hurdles and now looks closer to real-world use cases than in previous cycles. In other words, don’t expect superbulls, or hodlers, to cash in.
There is really nothing about this setback that has changed any of the fundamental positive characteristics that have driven the crypto market up in the long term, said Matt Hougan, chief investment officer of crypto fund provider Bitwise Asset. Management.
His advice? Invest for the long term, size your portfolio appropriately, and understand that this type of withdrawal is part of crypto. You don’t get an asset that goes straight up. This includes Bitcoin.
Write to Avi Salzman at [email protected]
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