data taken at 9:36am 27/11/2020
Written by: Yves, Head of Trading at Wirex
After 7 consecutive weeks of positive performance, the Bitcoin price (BTC/USD) momentum finally broke yesterday. The 8% daily correction, close to close, was triggered by larger exchange inflows observed when the price nearly reached its all time high (ATH), touching the $19,490 level. The “total amount of BTC transferred to all exchanges’ wallets” (cf. graph produced by Cryptoquant) increased during the days preceeding the market crash, and reached yesterday its highest level since the start of the covid-19 crisis in March. 111,000 BTCs were sent yesterday to the exchanges, twice as much as the year’s average, but nearly three times lower than the peak of March. Yesterday’s large exchange inflows are mostly explained by the drop in equity value of derivative positions (futures and options) that piled up in recent months. Indeed, with the crash, liquidations of long future positions are reportedly close to $2bio. Bybt reports that 72% of long positions (59,240 traders) were liquidated in the last 24 hours across major exchanges.
If a larger flow to exchanges can initiate a market drop out of fear of an increased supply, in turn, a market drop will trigger forced liquidations as the margin of derivatives positions decreases. At first, the fear of forced liquidation boosts the volume of collateral injected into derivatives exchanges. Then, the forced liquidations are essentially market orders to sell the BTC collateral, sending the BTC/USD price further down. This mechanism describes the high leverage effect that sent the Bitcoin price 13% down in less than 7 hours.
From a fundamental point of view, the miners to exchanges flow remained relatively low, suggesting that miners were not essentially the profit takers. The miners last significant inflow was recorded on November 6th, which triggered (among other events) the previous break between the $15,000 and $16,000 levels. Since then, numbers suggest that miners have mostly adopted a wait-and-see approach.
Although the collapse followed the release of the Fed Minutes, the Bitcoin price showed strong decorrelation with the price of Gold (XAU/USD) and traditional markets in general since the end of October. Also, the late institutional investors who are primarily concerned with macroeconomics are typically long-term holders looking to gain exposure to the main cryptocurrency in order to diversify their portfolios. It is unlikely, but possible to some extent, that the collapse would be attributed to both the correction of an overbought sentiment, and the re-balancing of exposure from Bitcoin to treasuries or traditional market securities: The FED is expected to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace”, driving prices of securities higher.
Finally, rumors broke out on November 25th that “the U.S. Treasury and Secretary Mnuchin are planning to rush out some new regulations regarding self-hosted crypto wallets before the end of the presidential term”. As mentioned by Coinbase’s CEO Brian Armstrong, these regulations would “require financial institutions to verify the recipient/owner of the self-hosted wallet, collecting identifying information on that party, before a withdrawal could be sent to that self-hosted wallet”. Although it is unlikely this regulation would pass before January, the accumulation of negative announcements this week were all catalysts for the severe market correction. The shift in sentiment could send the Bitcoin price back to $14,000. For the time being, the $16,500-$16,600 range is acting as a light support ahead of the Bitcoin Black Friday, a test of Bitcoin’s integration with Main Street.