The media has been hard-pressed to come up with a fundamental reason why the price of bitcoin suddenly jumped two weeks ago. While most explanations offered make little sense to us, coordinated quantitative trading strategies following the breach of key technical resistance barrier alongside short liquidations make the most reasonable sense to us.
Two weeks ago in the middle of the night (for those of us on EDT), crypto markets seemingly jumped back to life. Bitcoin (BTC) prices jumped nearly $1,000 (~22%) in less than an hour and trading volume exploded, leading to a rally in digital assets across the ecosystem. We received numerous inquiries from clients seeking a fundamental reason for the jump as many were not satisfied by reports in the media, which offered stories of:
- An April Fool’s joke taken literally | Source
- An anonymous buyer of $100M BTC | Source
- Futures expiration | Source
- And the rise of algorithmic trading | Source
Some of these explanations are easy to dismiss outright — the time stamp of the April Fool’s article doesn’t match with the jump, rolling or buying financially settled futures contracts creates no demand in the underlying asset, and placing a $100M (limit?) order on 3 exchanges seems ill-advised given that a recent report from Bitwise Asset Management highlighted that real daily BTC spot volume was $273M.
But for those of us in crypto, these discontinuous jumps have become a persistent “feature” of markets. They’ve become so numerous recently they’ve been pejoratively given the nickname “Bart Simpson trades” for their similarity to the iconic cartoon character’s head.
Given their frequency and our technical resources — our subsidiary, DAR Data Services, aggregates data from dozens of exchanges on hundreds of token pairs in real time — we decided to dive a little deeper into the details to figure out what was behind this specific jump.
After a disastrous 2018, traders had been looking for a bottom in bitcoin prices with many citing $4,200 as the next resistance level. Several times previously bitcoin prices attempted to break through this level but had been rebuffed. Then in the early hours (UTC) of April 2, bitcoin prices were once again poised to break through.
The First 8 Minutes
The jump in prices began at around 04:30 UTC (12:30 AM EDT) as bitcoin broke through $4,2000. The following chart is a by the second analysis of trading volume and prices on 10 of the top crypto exchanges.
There are two observations from the data. First, the inflection upward was not a discontinuous jump, as it may appear on many popular charting tools, like Trading View. While this is a decompressed timeframe, trades were continuously executed throughout the jump up. Second, prices inflected (accelerated) upwards as they moved through $4,200 and then decelerated following the jump to $4,300. This indicates the $4,200-$4,300 zone was the resistance zone.
During the first 8 minutes of the jump, a total of $48.0M was executed in BTC trades across those 10 exchanges, with Binance executing 36% of all orders, followed by Bitfinex and Coinbase at 21%.
From $4,200 to $5,100 in an Hour
The entire rally from just under $4,200 to just over $5,100 lasted less than an hour. During that time frame, $794M of BTC trades were executed on previously mentioned 10 exchanges, with a total of $2.1B executed on the 30 exchanges measured by DAR Data Services.
Role of Short Covering in the Rally
During price jump, $470M worth of shorts were liquidated on popular futures exchange Bitmex. Our understanding is that Bitmex liquidations can occur automatically to comply with margin requirements either by a Limit order or a Fill or Kill order, depending on a trader’s risk level. Either way, it’s easy to see how significant price volatility can result in a cascade of short or long covering. It’s less clear to us how prices interact between futures and spot. Clearly, they are correlated but that doesn’t necessarily imply causality. If a cascade of margin induced futures liquidations informed a movement in spot prices on “physical exchanges” exchanges, we would not be surprised. In fact, that might be the best description for the frequency of these “Bart Simpson trades.”
Given how quickly these jumps occur, we believe that quantitative trading strategies that simultaneously key off this insight are probably the highest likely candidate for the reason for the jump. Traders could manually get the same type of execution around a resistance level by entering a Stop Limit order. Either way, don’t have a cow man.
To find out more about DAR’s work for institutional crypto investors, please fill out an inquiry form here.