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As the world's most valuable cryptocurrency , Bitcoin plunged 21% in two trading days, falling to as low as $32,389. After Bitcoin hit a record high of nearly $42,000 on January 8, the cryptocurrency recorded its biggest two-day drop since the global market was first affected by the COVID-19 pandemic last year.
As of press time, the price of Bitcoin fell 14.6% to $34,694.53, while Ethereum plummeted 14.2% to $1,092.75. In terms of market value, the current total market value of cryptocurrencies is $938.005 billion, which has evaporated more than $160 billion from $1.1 trillion a day ago. In addition, data from Bitcoin Home shows that 184,725 people have had their positions liquidated in the past 24 hours.
“Whether this is the start of a larger correction or not is yet to be determined. Given that we are now seeing bitcoin break out of its parabolic uptrend, it could be,” said Vijay Ayyar, head of business development at cryptocurrency exchange Luno. Bitcoin’s price has more than quadrupled in the past year, bringing back memories of the frenzy of 2017 when cryptocurrencies were a hot topic before prices crashed.
In response, Scott Minerd, chief investment officer of Guggenheim Investments, tweeted: "It's time to take some money out. Bitcoin's parabolic rise is unsustainable in the short term." Minerd predicted in December last year that Bitcoin would eventually rise to $400,000.
True believers in Bitcoin believe that this round of Bitcoin's surge is different from past boom-bust cycles because the cryptocurrency asset has matured as institutional investors have rushed in and is increasingly seen as a legitimate hedge against dollar weakness and inflation risks. But others worry that this round of surge has no reason, is mainly driven by massive fiscal and monetary stimulus, and that Bitcoin is unlikely to become a viable currency alternative.
“Bitcoin is almost certainly in another bubble, and its current growth rate is unsustainable,” Howard Wang, co-founder of Convoy Investments, said in a Jan. 10 report. “While Bitcoin may mature in the future, its existence is largely a speculative asset.”
Bitcoin has recovered from its recent plunge but will continue to fall, according to Luno’s Ayal, who said the price of bitcoin could rise back to $44,000 “before a real correction begins.”
Algorithmic Trading
According to data provided by research firm CryptoCompare, as Bitcoin plunged last Sunday, trading volume on the world's six largest cryptocurrency exchanges also increased by 10% compared with weekdays. This represents a significant change compared with the previous 11 months, when weekend trading volume was 13% lower than traditional trading hours.
The frenetic weekend brought new challenges to market players big and small, who had to schedule desks outside traditional office hours or risk missing out on potentially lucrative or disruptive price moves.
What caused the change? According to interviews with multiple cryptocurrency brokers and traders, the surge in bitcoin has been fueled by increasing activity in the market by larger U.S. investors such as hedge funds, particularly their use of trading algorithms.
Investors use algorithms to buy and sell smaller chunks of bitcoin, which don't have much impact on prices. Cryptocurrency exchange Coinbase said in a December blog post that U.S. software company MicroStrategy used the technology to buy $425 million worth of bitcoin. "Trading activity used to be based on traders buying a specific amount at a certain moment, which was more common during the weekdays," said Blair Halliday, Gemini's UK head. "The amount bought at this time is too large, so these trades will continue into the weekend."
But the technique can trigger huge price swings on weekends, when liquidity tends to be thinner — in short, there are fewer bitcoins on the market at any given price, even if volume remains high. As manual traders and other algorithms follow suit, volatility is further amplified.
According to data from US research firm Coin Metrics, the gap between bid and ask prices on major cryptocurrency exchanges widened during the Christmas season, indicating a weakening of liquidity. Volatility also rose sharply. The Bitcoin market has been running non-stop, creating conditions for price fluctuations at unpredictable times. However, judging from historical trading, retail investors and day traders have driven this trend.
But during bitcoin’s recent surge, large U.S. investors have played a bigger role in determining the price action. Since the start of last year, bitcoin’s price has risen more than fivefold to a record $42,000 last week. The role of algorithmic trading has increased as hedge funds and more traditional investment managers enter the market, leading to big swings in bitcoin’s price over the weekend.
Algorithmic traders in the cryptocurrency market use similar techniques to mainstream assets. One of them is called time-weighted average price, which allows traders to buy and sell a certain amount of Bitcoin within a specified time. Another is volume-weighted average, which allows traders to place orders based on the volume of transactions in the cryptocurrency market at a given time.
But the technology coexists with manual trading, both in-person and over-the-counter. As weekend activity increases due to algorithmic trading, manual traders must also work around the clock to take advantage of price fluctuations. “Funds are constantly looking for opportunities in the market, seeking volatility, which usually occurs during periods of low liquidity,” said Fernando Martínez, head of the Americas at cryptocurrency trading firm OSL.
Still, unlike traditional assets, the cryptocurrency market does not rest, which is also a positive factor for investors who want to react quickly to price volatility events that may occur on weekends or public holidays. Chris Zuehlke, global head of cryptocurrency exchange Cumberland, said: "If an event occurs during the weekend, investors who participate in cryptocurrency trading during this period can hedge their risks immediately - this is a very powerful thing for the market." (Tencent Finance) |
