What’s That to do With the Price of Bitcoin?
A breakdown of what retail cryptocurrency investors mean in discussions about market manipulation.
Last year in cryptocurrency, few topics were as easy a source for harsh words and anger as that of price manipulation. Who can blame? Bitcoin’s dollar value fell steeply at the end of Q1 after six prior months of higher closes and took the whole market with it. Many began to point the finger at whales for foul play.
Here’s a chart of Bitcoin’s parabolic move, where it rose from circa-$5,000US in March 2020 to $50,000 in February 2021. It was then range-bound between $50,000 and $60,000 until April, when it broke below.
During the rally, bulls in Bitcoin’s multimedia frothed at the mouth over institutional crypto balance sheets — which were seeing rapid expansion — and the effect was that many retail investors bought in during this time; a doomed affair, since it was as little as two weeks before they lost forty percent of their investment, and five months thereafter to break even. So what happened?
Key points:
- Institutions are the biggest market participants and have been responsible for no less than 90% of trading volume since Q3 2020
- The price of Bitcoin went parabolic because of the perfect storm that was 2020, benefitting from a post-GameStop investing climate, lockdowns, and economic stimulus
- Issues like China’s miner exodus and shifting market sentiment led to the intramonth price crash
Social media suggest market manipulation, a concept that isn’t new to cryptocurrency. Spoofing is the practise of placing large buy or sell orders to trigger a beneficial price movement, then cancelling them before they’re filled to execute a profitable trade. It’s one example of fraud that would incur fines in securities, but in cryptocurrency there’s no authority to prosecute bad actors. For the reason of regulatory lag, the market in its infancy is still referred to as the Wild West.
The mode advertised as responsible for the 2021 corrections and shakeouts is Wyckoff distribution, coming into public discourse after a YouTuber named ‘uncomplication’ raised the alarm about a correlation between Bitcoin’s price action and its textbook model.
À la Wyckoff theory, Bitcoin’s parabolic rise and subsequent stagnation would have been orchestrated by large operators in the market — dubbed one entity: the ‘Composite Man.’ His purpose was to extract as much money from retail investors as possible by manipulating their fear and greed. He also instigates movements above or below zones of support and resistance with the goal of misinforming investors and creating opportunities for profit, eventually reaccumulating once demand has been exhausted.
Bitcoin’s centralisation is evidence to the theory: 1000 people own 40% of the supply, and IntoTheBlock researchers found at least 90% of its $42Bn average monthly transaction volume in 2021 had originated from large operators. Further still, though the intended view of Wyckoff’s Composite Man is as an aggregate of big money’s interests, collusion is not beyond the pale; It’s difficult enough for authorities to verify in regulated markets but nearly impossible in cryptocurrency. This is for two reasons:
- The system is quasi-anonymous, which is to say that while all transaction history is publicly visible on the blockchain, it’s meaningless if the wallet holder’s identity is unknown.
- Large operators can spread their crypto assets over multiple wallets for added privacy and security. For example, it was common knowledge that Tesla purchased $1.5Bn worth of Bitcoin in February 2021 — meaning they hold anywhere from 37,020 to 51,137 bitcoins — yet nobody has been able to verify their wallet address.
However, there’s more nuance to the subject of predatory market activity by big money. From a helicopter view, there are many other factors that led to Bitcion’s rapid rise and subsequent downfall that cannot be so easily explained by market manipulation.
The Rise
Due to the supply shock it creates, Bitcoin’s quadrennial Halving has always brought an avalanche of new money to the asset class. The 2016 halving led to Bitcoin’s market valuation peaking at a $237Bn a year later, whereas in the recent one it peaked at $1.156Tn — nearly five times greater. Two important differentiations led to this cycle’s price rise being especially meteoric: the infamous GameStop short squeeze and the global pandemic.
Global Pandemic
From Q1 2020 until late 2021, this period saw rolling lockdowns and economic stimulus across the globe. The effect of this was that people in most nations had an abundance of free time and money, due to furlough or other economic schemes designed to stave off a recession. Household stock market participation was increased, and shares of tech stocks like Amazon and Netflix sported high double-digit increases as they saw more regular use. Bitcoin was able to benefit from the trickle-down effect due to its shifting correlation with tech stocks.
GameStop
The GameStop short squeeze was triggered by a Reddit user on r/WallStreetBets, who published findings about the over-extension of hedge funds in shorting GameStop.
Short selling is the process of borrowing an asset and selling it on the open market, hoping to purchase and return it at a lower price. It carries the inherent risk of having to cover those positions at a higher price than was paid for in the event of a market rally, and this is exactly what happened to hedge funds shorting GameStop in a well-publicised event that ended in the bankruptcy of Melvin Capital. Many regular investors were granted life changing money almost overnight, but this created a climate of gambling in financial markets that carried over for months.
For these reasons, many low-information investors entered cryptocurrency with unearned money and the goal of changing their situation in a short timeframe. The only voices they would have heard were those that catered to demand: Media about the next 10,000x coin, or theories for Bitcoin going to $1M by end of year; more moderate voices were unheard. Because of this, the price of Bitcoin went parabolic and each drawdown in the market was sensationalised as the ‘final opportunity’ to buy in early. Many now know this as cryptocurrency’s mania phase.
The Fall
China had been a major player in securing Bitcoin’s network due to cheap energy costs and was responsible for sixty-five percent of the global mining hashrate. However, in the first quarter of 2021, regulatory ambiguity about the Chinese Communist Party’s upcoming CBDC had caused regional miners to begin selling their bitcoins. In June, all mining operations ceased within China, lowering computational power on the Bitcoin network. This meant that until its difficulty algorithm readjusted, Bitcoin mining was less profitable, and other miners would have had to sell more bitcoins to cover operating costs.
Around the same period, it came out that Tesla had sold 10% of their Bitcoin holdings — later put out by the CEO to be proof of liquidity — but this led to a negative shift in market sentiment prior to the tweet. Altogether, news at these events worked to wipe out over-leveraged traders, adjacent to any foul play in the market by large operators, and triggered the liquidation cascade that led to the intramonth price crash.
Conclusion
In the end, what’s been most harmful to retail investors in cryptocurrency is their expectations; the toxic optimism, unsound theories, and outright lies of crypto media played no small part in this. Determinism has a place in investment — the space is exciting, and past data asserts that it trends upwards over time — but should sparingly substitute good sense. The narrative of market manipulation has ended up sullied by those using it as a blanket term to cover for impatience, lack of knowledge and poor investment decisions during all-time-highs.
Here are some guidelines that can help you have a more deliberate, yield-bearing approach to the cryptocurrency market:
- Strategize in accordance with your risk tolerance
Whether it’s leverage trading altcoins or having a Bitcoin heavy portfolio, always try to understand and manage the level of risk your investment is at. The only strategy some have is how they’re going to sell their crypto holdings when its value increases 100,000x overnight. - Be slower to act
By taking longer to act you become a more deliberate investor — you have more time to research and form solid convictions to invest upon. As Warren Buffet says: don’t lose money. FOMO is a real thing. How many times have you felt one way about an investment one week, then another the next when it’s down 20%? - Research all messaging in cryptocurrency
Buzz plays a huge part in a project’s short-term price action, and multimedia coverage can help you gauge sentiment. However, when you come across a narrative that sounds unrealistic, it probably is.
New to trading? Try crypto trading bots or copy trading
