Volatility and a Timeline
On Wednesday October 10th, Bitcoin volatility made headlines again after weeks of sideways consolidation and Bitcoin appearing to have a “stable” price. The digital asset’s price dropped some 10% on leveraged swaps exchange Bitmex, while spot exchanges only experienced a 7% drop from previous swing high.
On the left is the Bitfinex chart and on the right is Bitmex. As you may have noticed, there is much uncertainty surrounding the current premium on Bitfinex. As concerns towards insolubility, Noble Bank, and Tether speculation seem to dominate Crypto Twitter, we believe that the Bitfinex/Tether connection is not solely responsibility for this price action.
Suppose a big player wanted to accumulate a large amount of Bitcoin, an amount large enough to move the Market 10%. How would they go about execution?
The chart above represents scenarios as to where enough BTC could have been purchased. Purchasing enough Bitcoin to move spot markets 10%, on spot exchanges, with BTC trading at the previous range, could have unleashed a buying frenzy as price action would have reached $7300. Such a spike could have triggered more buying and the beginning of a new uptrend.
A player with big enough pockets to cause such a spike is not new to markets. What we witnessed was the work of a seasoned veteran, with impeccable timing. Here’s why:
L1 on the chart represents Long Scenario Number 1, which was not an option.
S represents the short play, and L2 is Long scenario Number 2.
First step to accumulating so much BTC without triggering a breakout is to execute a short first- break down price action using swaps, as there was not a better time to short BTC than Wednesday. Legacy markets had been in a three day decline. Even though there is little relative correlation between these markets, sentiment was down. Buying the dip during what appeared to be a time of financial market collapse isn’t a practice for retail or the frail.
Next step was to accumulate Bitcoin at spot and create OTC supply as some holders get shaken out. Whilst spot accumulation happened, shorted swap positions were covered. This created a bear flag pattern and further attracted retail shorts as a large portion of retail still believes there is room for further downside.
Bitcoin’s previous range and price action created somewhat of an imbalance on OTC markets. Institutions and the race for new institutional products is diminishing current supply.
Big players couldn’t accumulate enough Bitcoin on OTC markets, nor did they want to create a major buying frenzy by purchasing BTC on spot exchanges, so they had to short swaps first.
Why not allow the token to range trade and accumulate the range?
Inefficiency, and the last series of trading ranges accompanied by minor breakouts resulted in a price channel from $6,000 to $6,800. It was much more efficient to execute a big short first thus leveraging existing holdings to decrease market price in order to accumulate at lower prices without creating a buying frenzy.
BAKKT launch is less than a month away, and just today Fidelity announced Fidelity Digital Services. The latter is expected to launch in 2019, yet another institutional instrument for trading digital assets.
The rapid influx of buy volume we witnessed overnight could indicate that the accumulation timeline to acquire the needed amount of Bitcoin is coming to an end, though we might witness another round or two of this practice.
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Author: George Saber
Editor: Matthew Pink