Three key takeaways:
- For weeks, the Bitcoin market has looked propped up by the whales, especially after the recent FTX disaster.
- Bitcoin hodlers should strongly consider moving into gold, silver, or at least Ether.
- Full disclosure, I have a complicated relationship with Crypto.
An Artificial Market
I have specifically avoided writing about Bitcoin despite having strong opinions on the subject. Bitcoin is a very hot topic, and most people have already made up their minds. In short, I think it has zero value but that argument has been made many times before so I couldn’t add anything new to the conversation.
Full disclosure, I have been in the Crypto market since 2013 and am net positive. That said, given recent market events, I cannot sit by in good conscience without giving fair warning. This is not a Bitcoin is worthless analysis, this is a wake-up call to push people to ask what is keeping this market from imploding. FTX isn’t the canary in the coal mine (that was Celsius, or one of the other firms that crashed this year). FTX is the coal mine, and it just collapsed.
I think the data shows that this market is being propped up by whales. If the dam breaks it could send markets crashing. Back on Oct 31, before anything happened with FTX, I texted a close friend:
My new theory is that the whales are not trying to pump the price anymore. Instead, they are trying to stabilize the price to win back institutional investors. I have never seen bitcoin price volatility so low over a 6 month stretch in 10 years. It just totally stopped moving after an epic collapse back in June. No bounce, no continuation, no nothing. Just super tight price range even while the stock market has continued falling.
I was led to this thinking after watching Bitcoin crash in June to ~19k and then just hold. It spent the next few months consolidating while the bond and stock markets went into turmoil. See the chart below with the simple price of SPY overlaid on top of Bitcoin since 2021. You may notice how steady the orange line has been since June 21, directly after the Bitcoin crash below $20k.
Let’s compare the 30-day rolling annualized standard deviation between Bitcoin and the SPY. This chart shows the difference in volatility between Bitcoin and SPY. Notice how it has been collapsing in recent months, and Bitcoin was actually less volatile than the S&P for a brief period in October. Since when is Bitcoin less volatile than the S&P 500? That has quickly reversed since the FTX fiasco.
Figure: 2 Volatility/Standard Deviation
However, while price volatility is falling, trade volume is not. The next chart is the 30-day rolling average trade volume of Bitcoin compared to the price. Once again you can notice a misalignment. As volume was steadily increasing over the last several months, the price stayed in a tight range.
Usually, large changes in volume are accompanied by large moves in price. But in this case, volume was moving up steadily while the price stayed nearly flat. How and why was this happening?
As I alluded to above in my text to a friend, this looked like an artificial market. The market nearly collapsed back in June and then just flatlined near 20k. That doesn’t happen, especially in Bitcoin. After this past week though, I am now convinced this market is being artificially propped up. After all, 27% of the market is dominated by a super minority of less than 0.01%. They have a major vested interest in keeping this market inflated. I think the increased volume against stable price action is from whales defending the price and painting the tape.
I won’t rehash what happened with FTX this week (there are 1,000s of articles explaining the epic collapse). Instead, I will just highlight that this is a MAJOR event in the Crypto space. To Crypto, this would be like 3 Enron happenings all at once, or Enron and Madoff happening in the same weekend. This is catastrophic on every level, but the price of Bitcoin only fell by about 20%. What?!?
In the stock market over the past several weeks, companies have been reporting disappointing earnings at a frequent clip. Each company has been absolutely punished for it. Some have fallen 20% or more in a single day which is extremely rare. These are bad earnings for major corporations that still have revenue. Yet Bitcoin has its Enron + Madoff moment and the price of Bitcoin drops by the same ~20%?
No way! I am not buying it!
Step back and think about this for just a moment. Take another look at the charts above that show how the price volatility collapsed despite steadily increasing trade volume. Most importantly, look at the recent massive spike in trade volume from FTX and the relatively minor price drop.
Head over to SchiffGold to keep reading and see the analysis on GBTC premium/discount
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