Bitcoin Price Surge: Bad Execution or Mirror Trading?
Posted by Colin Lambert. Last updated: February 9, 2021
While The Full FX may be a new publication its first week was graced with a familiar story – a blow out in the bitcoin market. The cryptocurrency soared over $47,000 for the first time – just the cheeky 17% rise on the day – in the wake of news that Tesla had bought $1.5 billion and was planning to accept bitcoin as a payment.
Aside from thinking that Elon Musk is really trying to get the world to the stage where it costs one bitcoin to buy a car, it is an interesting insight into how the cryptocurrency trading world works.
The first thought was that this was what happens when someone tries to buy one and a half billion of anything, you get execution slippage. It turns out, however, that Tesla probably bought the bitcoin in January – the news was in the firm’s annual report on page 23, and may indeed be responsible for the spike in bitcoin at the start of the year when it jumped from $28,000 to over $41,000 in the first week.
So it’s unlikely to be execution slippage, although if the order did move the market $14,000 in January that was a factor (and I am sure, somewhere, there is a player who can provide a TCA report showing it was best execution).
It could be that a major and influential manufacturer like Tesla accepting bitcoin is a positive news story for the cryptocurrency, which indeed it is, but 16%? Musk also made supportive comments about how mainstream investors are starting to take a serious interest, which will probably burgeon into more demand.
Events such as these, especially if they are followed by a correction, may only serve to increase the reluctance of institutional investors to jump on the bandwagon
In reality, however, the price spike is likely the same phenomena as that which saw the (originally) joke cryptocurrency dogecoin skyrocket recently – followers of Musk on Twitter (and elsewhere) taking his comments as wisdom. It’s just another form of mirror trading or of retail investors showing their muscle. Effectively, a smart and rich man has bought a lot of bitcoin and that is good enough for a great number of punters to do the same.
The cynic would observe that this is a great way to insure exposures, buy a load, tell the world and then watch as they provide if not an immediate 16% return, at least a healthy stop loss buffer!
The concern is that events such as these, especially if they are followed by a correction, may only serve to increase the reluctance of institutional investors to jump on the bandwagon. Of course, there is an opportunity to make money here, but it is unclear whether traditional strategists and investment managers at institutional funds view these types of moves as rational? It will make for good reading in an investors’ report – “returns were dented by a tweet from (fill in name of celebrity) which sparked a 15% drop in the price of bitcoin”.
It makes for fun and games, and as a trader it looks a great market to be in, but even in the course of writing this short story the price has risen over $2,000, so it remains subject to price shocks. As long as these shocks are to the upside nobody cares, and there are enough HODLers who are sitting pretty and can withstand anything but a Tulip-type shock.
The challenge will be for those now looking into the market is having the courage to buy an instrument that is priced such that it is very unlikely to be used as a mainstream currency; is controlled by a few; and provides no discernible service.
It’s still a buy the dip market of course, it’s just that as long as we have price moves like those seen recently, when one player tries to buy a chunk, the really big money is going to stay away. After all, as all traders will tell you, the entrance to a position is the size of a football stadium; the exit is the size of a bathroom window.