On April 2 the market experienced an extraordinary price increase in Bitcoin. Over a short time period the price increased byas much as 20%. The debate over the reason for the surge is still on-going in the trading community.
According to speculation in the media, the catalyst for this surge in price appears to be from a single source, placing a $100 million order in the market over a short period of time. The order was split between three markets, Coinbase, Kraken and Bitstamp. These three markets all have a typical daily volume of $50-$100 million each, so this order made up a third of their normal daily turnover.
Moving the market 20% with an order making up 1/3 of the daily volume, doesn’t seem unrealistic. The interesting aspect here is that the Bitcoin price on all other markets globally quickly followed. With a daily volume of $10 billion reported by Coinmarketcap, the price should not be this sensitive to a $100 million order.
We have also seen that the reported daily volume of Bitcoin traded has doubled following this price increase, from $10 billion to $20 billion. This is a remarkable increase, catalyzed by one buyer with $100 million.
This highlights some of the problems with the current crypto currency markets.
- Liquidity is not easily transferred from one marketplace to another. Each orderbook is isolated and a big order will consume all volume and move the price.
- The reported daily volume of $10 billion is unlikely to be real. A very big chunk of this volume is fleeting or false and will not be available to fill real orders. The price formation and market data quality needs to improve in order give us a fair and orderly market in which we can trust.
- The trader placing the order appears to be a professional and knowledgeable trader based on the way in which the trades were inserted and managed in the markets. For this large overall order, they chose to use marketplaces ranked around 50th place in global bitcoin volume drawing interesting potential conclusions. This could be interpreted as meaning that the 40 larger marketplaces that are not viewed as trustworthy for depositing funds and executing large volumes. Furthermore, perhaps this trader assessed that those reported volumes were not genuine, and thus felt these were the most likely markets to actually be able to fill their order size. This should be a big concern for the industry.
- Prices can still be manipulated. If $100 million can buy you the power to move the market like this, ETFs and derivatives based on Bitcoin should still be viewed as high risk alternatives. Imagine for a moment what the impact on the market would be if the SEC were to actually approve a bitcoin ETF, and launch a rush to accumulate the cryptocurrency in order to fill the holdings for that product, which could easily add up to $1 billion, based on typical successful ETF sizes.
Though this particular series of events was a surprise for the market, and Tritum, we are not surprised by the behaviour of the market.
Regardless of the true size and believability of reported volumes, this type of event will bring out the truth in the actual market and it’s ability to accommodate and respond to major activity. The format of the existing crypto infrastructure continues to require traders to assess the round trip cost of transacting in every measure of the process, not just best execution at a given price as would be the case in developed equities or other markets. It is very likely this trader is fully satisfied with their order fill even if it cost them an additional 10–20% premium to the price, as the true measure of success is not even the slippage and thus cost per unit of acquiring their bitcoin, but rather the risk measure of even being able to receive and own the cryptocurrency they have bought in exchange for the cash they deposited with the platform. Should for any reason they not have been able to withdraw and own their crypto, their result would have been $0!
Tritum continues to work towards deployment of our securities exchange regulated grade of digital asset exchange for exactly the reasons noted above. We seek to remove the risk and ambiguity for market participants so that they can focus on their core business, and allow liquidity and maturation of this market to flourish.
We invite any affected or interested market participants to contact us to learn more about how Tritum can serve their needs.
The author is a co-founder of Tritum Digital Assets and a former Vice President of Nasdaq and Head of Economic Research, responsible for reporting all volumes of Nasdaq’s Nordic Exchanges. He is also a former Finance Director of the US Consolidated Plan, the UTP Plan. The plan governs transaction information from all US securities exchanges, is approved by the SEC and provides millions of investors with reliable data.