Crypto Corner - Summary of the Week 11/01/21

data taken at 9:39am 15/01/2021

Written by: Yves, Head of Trading at Wirex

After reaching a new all-time-high (ATH) at $42,000 on January 8th, the Bitcoin price (BTC/USD) dropped to $30,261 on January 11th, suffering a 28% correction from its peak. The price reached $40,000 once again on January 14th, suggesting a short-term market consolidation around the current levels. Despite most indicators supporting the rally, speculators decided to take profit at the $42,000 level. The correction was highly unexpected:

  • There is no clear indication that miners were sellers at $42,000 as the net outflows of Bitcoin from exchanges remained steady according to the “All miners outflow” graph produced by Cryptoquant.
  • There was no surge in the net inflows of BTCs to exchanges that would indicate a large seller’s intent to sell. Two weeks ago on January 3rd, a net inflow to exchanges of 17k BTCs was recorded: it triggered the first significant correction (~ -16% on January 4th) of the December-January rally. However, there was no such trigger to explain last Friday’s correction.

BTC: All Miners Outflow: The total amount of BTC transferred from all miners’ wallets

On the contrary, Glassnode reports that whales invested further during the dip, considering the correction as an opportunity: the number of wallets holding more than 1,000 BTCs increased as the market dropped.

Certainly, the 28% correction is far from irregular in cryptocurrency markets: similar corrections happened every two weeks during the December-January 2017 rally. It’s also always relevant to recall that the Bitcoin price had drawdowns exceeding 80% in the past… but this scenario seems extremely unlikely to unfold this time as the involvement of institution-grade investors is bringing more resiliency to the market. These investors typically have clear targets for both the percentage of their portfolio allocation, and the investment horizon. For insurers in particular, portfolio rebalancing is a low-frequency event that would happen at least once a year. Their investment horizon is clearly long-term.

If large institutionals and miners are not selling, rather accumulating BTCs, then how do we explain the price drop on Monday? The trigger might have come from Guggenheim Investments’ CIO Scott Minerd Tweet on Monday stating:

“Bitcoin’s parabolic rise is unsustainable in the near term. Vulnerable to a setback. The target technical upside of $35,000 has been exceeded. Time to take some money off the table.”

Guggenheim Investments has been investing in Bitcoin since the $10k levels. Its CIO declared to Bloomberg in mid-December that their research shows Bitcoin should be worth $400,000. However, as the rally evolved, he showed reluctance to buy above the $20k level and eventually shared his recent short-term view of a price correction on Twitter. His view also contradicts Guggenheim’s SEC filing to invest “up to 10% of the net asset value of The Guggenheim $5.6bio Macro Opportunities Fund in Grayscale Bitcoin Trust (“GBTC”)”. His view could have reflected the general sentiment among speculators, hedge funds and dynamic asset managers, eager to lock a high profit for their clients, or simply eager to prove their value as “traders” rather than simple “HODlers”.

As always, the severity of the drop can be explained by the ever-increasing open interest (OI) of derivatives markets. The OI of options reached $10.5bio according to skew.com. The growing OI unfortunately makes the Bitcoin price process more prone to manipulation by large speculators: the consequent liquidations that followed the initial price drop reached $2.5bio on January 11th across major exchanges and cryptocurrencies according to Bybt. $1.51bio of contracts on BTC were liquidated, which certainly drove the price further down. Regarding the risk of manipulation, as pointed out by crypytonews, it is easy to imagine a large player who starts to sell, makes a public announcement to create a panic sell scenario, and buys back BTC at a cheaper price.

Liquidations recorded by Bybt: the total size in USD of contracts liquidated reached $2.5bio on January 10th.

The risk of manipulation is hurting Bitcoin’s market integrity. The Bitcoin rally and the severe correction are triggering further scrutiny from legal authorities. Christine Lagarde reiterated to Reuters her concerns over the speculative nature of the first cryptocurrency: “(Bitcoin) is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity … There has to be regulation. This has to be applied and agreed upon … at a global level because if there is an escape, that escape will be used”.

Given the supply and demand considerations around Bitcoin, it is difficult to sustain that the price rally is manipulated. Instead, there are strong reasons to believe that Monday’s correction could be the result of an ill-intentioned manipulation.

While most major cryptocurrencies recorded exceptional performances in the past few weeks, Ripple’s XRP is still lagging behind, suffering from last year’s SEC action. Grayscale announced that it started to dissolve its XRP trust. Although the trust’s size is small (~$19M AUMs) compared to its Bitcoin alternative, the decision confirms the general bearish trend over the 4th cryptocurrency by market capitalisation.

Meanwhile, Ethereum is enjoying strong price momentum (+69% YTD) as both the Ethereum 2.0 (Eth2) and the CME futures launch in February are showing great promise for the second cryptocurrency. Eth2 is based on the Proof of Stake (PoS) protocol and would allow 100,000 transactions per second, versus a few dozens transactions per second for Eth1’s Proof of Work protocol. More ETHs are staked to act as validators in Eth2, confirming the high expectations over the upgrade. The change is also expected to boost the Decentralized economy in general, from Decentralized exchanges (DEX) to Decentralized Finance (DeFi), slashing transaction fees and speeding up execution.

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The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.
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