Analysis: What caused Bitcoin to surge above $10K over the weekend?

Source: Cointelegraph

In less than three months, the price of Bitcoin (BTC) has surged 68% against the U.S. dollar since December 18, 2019. It broke through the $10,000 level on February 9, marking the beginning of a broad rally across much of the cryptocurrency market.

Investors remain divided over Bitcoin’s recent rally. For example, Joe007, one of the biggest whales in the cryptocurrency market, has been convinced that the surge is purely the result of manipulation.

Other investors such as Adaptive Capital partner Willy Woo and Three Arrows Capital CEO Su Zhu said that from the beginning, both fundamental and technical factors supported the market's rise. When the price of Bitcoin hovered around $7,000, Zhu pointed out that the premium of the BTC/USDT trading pair indicated that an accumulation phase was beginning, especially in Asia.

While explanations for the recent Bitcoin craze vary, they ultimately boil down to three main factors: the accumulation of momentum since December 2019, on-chain data indicating increased investor activity, and possible whale manipulation.

Factor 1: Bitcoin’s accumulated momentum since December 2019

On December 28, 2019, Zhu said that the BTC/USDT premium indicated that the number of investors was accumulating and that the price of Bitcoin could reach $9,000 by the end of January:

“BTC/USDT premium and price action show clear signs of accumulation and risk of repatriation. I wouldn’t be surprised to see 9K+ by end of Jan.”

At the time, the price of Bitcoin was hovering around $7,200, and at the end of January, as Zhu predicted, it reached as high as $9,500. When the BTC/USDT pair shows a premium over spot, it means that demand for Tether and Bitcoin is rising.

According to data from cryptocurrency research firm Diar, most of Tether’s on-chain activity in mid-2019 occurred in China. Trading volumes on Chinese exchanges are much higher than those on Western exchanges. The report reads:

“On-chain data shows that Tether’s trading volume hit an all-time high in the second quarter of 2019, with one month left on the calendar for that period. Most strikingly, however, Chinese exchanges process volumes that dwarf those of Western and global trading venues, accounting for more than half of all trading volume on known trading markets.”

Based on the premium on the BTC/USDT trading pair, and the fact that China accounts for the vast majority of on-chain activity, it is reasonable to infer that many investors in Asia were accumulating in the final months of 2019.

This gradual accumulation process continued into 2020, becoming even more pronounced due to the buzz surrounding the Bitcoin reward halving that will take place in May, laying a solid foundation for the recent sharp rally.

Factor 2: Whale manipulation

As the price of Bitcoin is in the mid-$9,000 range, Joe007 has been saying that the rally is being manipulated by fake buy volume and fake orders. After the price of Bitcoin reached $10,000, the Bitcoin whale wrote:

“I’m all for a good old fashioned BTC parabolic move, but I want to cash out at the end. But with low liquidity and anemic fiat inflows, that’s not going to happen if prices are being pushed higher by over-leveraged players.”

The main argument behind Joe007’s statement is that the recent craze was triggered by other whales placing fake orders on futures trading platforms to drive up the price of Bitcoin in an unorganized manner.

In margin trading, a spoof order is a fake large buy order, the purpose of which is to guide others into the market to buy, thereby pushing up prices. When the price rises, the order disappears, so there is the word "spoof".

While the Bitcoin rally was initially manipulated by whales, it is unclear whether the move to $10,000 and above is also being manipulated, given that spoof orders have appeared every time the dominant cryptocurrency shows signs of a pullback.

Simply put, if retail investors start participating and investing in this market out of fear of missing out, what starts out as manipulation could turn into organized. Throughout the run from the low $80,000 to $10,000, short sellers continued to put pressure on the market with a large number of short orders between $9,000 and $10,000.

As the price of Bitcoin rises, Bitcoin squeezes short contracts and pushes short sellers to the long side of the market, which then turns into buying demand, further causing Bitcoin to surge. Speaking of Bitcoin's return to the psychological mark of $10,000, a cryptocurrency analyst named Wright said:

“The market is looking for liquidity. There are hundreds of millions of stop-loss, liquidation and trigger orders hidden on this. The temptation is too great to pass up. Until the climax of this round, there is no real substantive move by spot sellers who have waited so long.”

The lack of fiat inflows has been described as the missing piece in Bitcoin’s upward move from $6,000 to $10,000. However, over the past few days, exchanges like Binance have begun to see some inflows, which could provide the necessary foundation for BTC to launch a sustained surge.

Factor 3: Increased activity among on-chain investors

Willy Wu has created various indicators that take into account both fundamental and technical factors of Bitcoin to predict its trend. He said that the probability of $10,000 being the top is basically zero. To explain this, Wu showed a chart with Bitcoin's price and on-chain investor activity data.

For example, the ratio of realized value to volume is used as a signal to find market bottoms and tops. When the price of Bitcoin reached $14,000 last year, the RVT ratio was close to 0.04. As of February 10, the RVT ratio hovered around 0.018, indicating that the price of Bitcoin is unlikely to reach its peak. When the price of Bitcoin reached $20,000 in December 2017, the ratio peaked at 0.12.

Could it be a mix of three factors?

Bitcoin’s rally from $6,400 to $10,000 likely started with whale manipulation, judging by the frequency and consistency of fake orders. However, it may have increased retail interest in the market, especially as Asian investors began to hoard coins in anticipation of the halving of overall Bitcoin mining rewards in three months.

Although the price of Bitcoin is currently hovering around $10,100, technical indicators do not show overbought conditions or signs of forming stage highs, which may allow the price of BTC to rise further before a pullback.