TLDR: This article describes the likely causes behind the 100% price increase of the MKR token in the first week of January 2021.
The rather strange and suboptimal price performance of the MKR token in the period between the rise of defi in June 2020 and the bitcoin rally in December has been described in the first article in this series. The cause was simple - large holders unloaded the token to either exit crypto altogether or to pursue other opportunities in the defi space.
This changed on 22 December 2020. A whale, lets just call him whale A, stopped selling. And in addition to stopping sales he or she started transferring MKR off the exchanges. The precise cause of this is unknown but one likely explanation is possible tax related. The MKR was hard to sell before the start of 2021 even at depressed prices so better to move it off the exchanges before the December 31 snapshot of inventories. It was not a huge amount, roughly 2200 MKR.
This event coincided nicely with another player, Polychain Capital, approaching the end of their MKR sales. The firm was an early investor in Maker, at one point sitting of 45k MKR. After the rise of defi this was moved onto exchanges at an accelerating pace. The reason for this haste is still unknown, a more patient approach would possibly have been financially much more beneficial. Their last batch of MKR, or at least what I have been able to keep track of, was moved onto Binance at the end of December.
Let us turn to the demand side. As major holders have exited the MKR token has been eaten raw by the crypto community. Maker's product, the Dai stablecoin, was so popular among investors that even holding the peg was a problem. Issuance of more Dai was largely constrained by community bandwidth and grew 1400% in a year. This resulted in a situation where the price of MKR was surprisingly low while the number of MKR holders grew by 400%.
This situation could not last and accelerated by the stellar price performance of ETH, the MKR sellwall started crumbling in the very first days of 2021. With fewer sellers and a battery of upcoming protocol improvements the price of the token went ballistic and went from crossing USD600 to touching USD1400 in the span of a evening.
Enter player B. This whale had either not recovered from the New Year celebrations, or was just out of rehab. Maybe he had forgotten owned MKR, or suddenly decided that a Lamborghini was a much better investment. Whale B apparently came to the conclusion that the token had increased too much in value and that the world would be a better place if his investment was worth less. Accordingly his divestment strategy was neither a high price sellwall or creaming demand tops, instead he just hosed the market. It only took 1500MKR to kill off the rally. His recently divorced wife laughed so hard she could barely drive to the bank.
What can we learn from this?
1) When the circumstances are right only a minor amounts of tokens are necessary to set things in motion. In this case 2200MKR to start the action, two weeks of patience, a trigger event and then 1500MKR to stop the show.
2) All the action (as far as I am able to tell) took place on centralized exchanges.
3) This will definitely happen again. Even at higher prices the funds necessary do not exceed USD2.5 million. This is peanuts for a lot of players in crypto.
Further research: What impact does the continuous token buybacks have? Is the effect limited to eroding sellwalls over time or does the buybacks function as a sort of psychological steroid?
Preemptive comments I have been asked by many readers, both in public and private, to include the ethereum addresses of my research. Valid question, but no. The reason is that the players involved have in many cases gone out of their way to disguise their token movement through the use of all sorts of looping accounts. The net result is a myriad of account numbers that would make any text unreadable. So no.
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