The Last Look…
Posted by Colin Lambert. Last updated: May 10, 2022
Well, this column was going to discuss the question, ‘What’s with Bitcoin price action recently?’ but the market seems to have stymied that with a sharp drop outside the recent $38-42,000 range.
That said, plenty of people were confused by what was going on, or rather wasn’t, with Bitcoin over the past couple of weeks. Equity markets have suffered, the dollar is in the ascendancy and interest rates are on the rise, but Bitcoin? Until the end of last week, nothing, it was stuck in a tight range but, perhaps significantly for HODLers, not going down.
That has changed and unless there is a decent recovery, May will follow April in being a pretty poor month for BTC and Ether, the former dropping about 17% from its peak at the start of April and then another 15% over the weekend. Of course, the reality is that April move down was largely done and dusted by the middle of the month. For three weeks thereafter, nothing, in spite of continued volatility in fiat markets.
Altcoins also took a bit of a beating and have continued to do so in the past couple of weeks, and, I suppose if you liken them to EM currencies then it’s likely they will fall further than the ‘majors’, but it seemed strange how Bitcoin just refused to go below $38,000.
The growing number of crypto strategists have their theories of course, all of which are worthy, and I have to hold my hands up and accept that my favourites (sarcasm alert), the technical analysts, were talking $38k as important support, but to me it’s a market structure issue. Not only that, it could be one that creates a potential challenge for any traditional institutional investors looking to access crypto.
The challenge for cryptocurrencies is, in spite of marketing to the contrary, the vast majority of holdings (in value) sit in a few hands. These players are the ultimate HoDLers and, in general, are in at much lower levels, which means when pressure is on markets, they just do nothing. They are not thinking mark-to-market – generally they are evangelists and will hold to zero – and this means that one of the basics of markets, someone has to actually sell for the price to go down, doesn’t really exist in crypto.
Evidence for this can be found in crypto volumes, which have largely been subdued – and this is a feature of crypto markets, everyone celebrates when they go up, and get involved, but when they go down, activity disappears. I was talking to a market maker in crypto last week (before the drop) who suggested that even in quiet markets there is still a skew to the upside when pricing for flow. The trader further observed that crypto was exhibiting a habit known to many in certain FX markets, it goes up by the escalator and down by the lift (elevator) shaft.
A third observation really interested me, however, and that was how liquidity providers are quick to disappear from certain venues when markets are going down, because, my conversant argued, “they still don’t know how to price a falling market”.
This all tells me that crypto is becoming more like equity markets – another asset class largely predicated on rising asset prices – than currency markets, in how it behaves, but interestingly, the market structure is heading in the reverse direction. There is a growing sense that OTC will win out, in fact that it has to if the institutional investors are to be comfortable entering the market.
The latter are needed if the crypto market is to mature, but a serious concern has to be overcome – big firms, with big money behind them, need the comfort of a market that can price them when things are going badly. The fact that some feel it is hard to get a price in hard times will only increase apprehension levels and slow adoption.
Perhaps the best thing for the crypto industry would be a steady downtrend characterised by higher volumes. Then, at least the institutions will see that they can clear risk if required, without destroying too much value. Until then, the correlation between volumes and direction is a worrying one for those awaiting mainstream crypto adoption.