Novum Alpha
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Novum Alpha

Balking at Bitcoin’s Bubbling?

  • Decreased weekend volumes for Bitcoin make it especially susceptible to wild price swings
  • Concentration of majority of Bitcoin in a handful of digital wallet addresses means that automated trading relying on price information may exacerbate the wild price swings through purchase or sales of Bitcoin in large quantities over the weekend

To the uninitiated, Bitcoin’s wild and extreme volatility can be heart-stopping.

Compared to traditional financial assets, a bet on Bitcoin requires more than a strong constitution, it requires Professor Xavier-levels of mindfulness.

On Monday, investors who had potentially taken their first foray into the cabal of cryptocurrencies were in for a rude shock as Bitcoin and other cryptocurrencies were dumped out of the weekend, when trading volumes are typically lower.

Sliding as much as 26% over Sunday and Monday, Bitcoin saw its biggest 2-day slide since the Ides of March last year.

An estimated US$185 billion of market cap has been shaved off the world’s largest cryptocurrency by market value, more than the market cap of 90% firms listed on the S&P 500.

But accurate numbers in the cryptocurrency space require a combination of estimation and divination and depending on where one draws their data from, can paint vastly different portraits of Bitcoin’s prospects.

Open interest on the world’s only fully regulated cash-settled Bitcoin futures exchange, the Chicago Mercantile Exchange, continues to be higher than at any time in the past, suggesting that institutional investors are continuing to take a bet on Bitcoin, one way or the other.

And considering that Bitcoin has more than quadrupled since 2020, some correction should be welcome.

After rallying to almost US$42,000 on the back of a flood of retail investors, some degree of profit-taking from investors who had bought Bitcoin in 2020 was bound to happen.

While many investors in Bitcoin, including some of the biggest institutional names, still believe that the long term trend for Bitcoin is bullish, they are also well aware that the cryptocurrency is likely to continue experiencing sharp and volatile swings in the interim.

And as more investors (especially retail investors) avail themselves of Bitcoin and other cryptocurrencies, regulators are casting a wary eye over what continues to be a largely ungoverned industry.

Regulatory intervention, whether through legislation or more aggressive enforcement could serve to put a damper on Bitcoin’s seemingly relentless ascent.

But for those who have been trading in cryptocurrencies for some time, this is just another day in Bitcoin-paradise — welcome to the club and don’t forget to take some stomach pills.

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An all-weather digital asset trading firm that uses Machine Learning tools to deliver dollar-denominated returns in all market conditions.

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Phuong Nguyen

Phuong Nguyen

Business Development of Novum Alpha, a leading quantitative cryptocurrency trading firm that specializes in Managed Account and DeFi products

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