On Saturday, October 26 2019, the price of Bitcoin jumped from $8650 to $10450 over the course of two hours. On Robinhood it briefly hit $41K, an astounding 400% increase over just a matter of hours. Why? Is this the start of a new bull market? Manipulation? Or just a few whales moving money around?
This blog post will look at some data to find out.
First step is to look at the charts and get an overall sense of the price movement and how it happened:
A few things to note from that picture:
The rise was rapid, but not too rapid.
It covered a period of roughly two hours, during which there’s a steady rise in the price. By contrast, green candles that are the result of a single whale happen within minutes, and then they’re over.
Volume was spread out across exchanges
Normally, the major exchanges have a certain baseline amount of volume. Binance (in blue) usually has between 40-60%, Coinbase (red) has another 20-30%, Kraken (teal) gets about 10%. Bitfinex (orange) can vary from anywhere between 5-25% – it usually has low volume in normal trading, but can spike to a majority of volume when a big Tether buy is going on, and is also a favorite of arbitrage traders (because the price frequently diverges from other exchanges) and so gets a lot of volume after there’s been a big move in the market.
The rest of the major exchanges have generally small volumes. Sometimes you’ll see large peaks from Bitstamp (pink) – it’s a frequent target of market manipulators because baseline volumes are low yet it’s a major price component of the BitMEX index. And sometimes there’ll be large volumes from Bittrex or Poloniex that are often the result of individual whales that have longstanding accounts there.
This move shows the general pattern of a broad-based market move: volume is spread out across exchanges, in roughly the same proportions that their normal trading has. Bitfinex volume is high, but not out of proportion from its normal baseline.
Volume was very large
If you look at the absolute numbers for the volume, they’re huge. Baseline volumes for recent cryptocurrency markets have been on the order of $5M per 5-minute period. During this run-up, volumes reached $200M per 5 minutes. All told, if you zoom out so that the whole run-up was one candle, you can see that almost a billion dollars worth of Bitcoin was traded during that two-hour period.
Some of that volume is undoubtedly arbitragers – for every initial purchase, automated arbitrage bots generate several dollars more in volume by transmitting the price to other exchanges. But given the scale of the initial move, it’s safe to say that tens to hundreds of millions of dollars in Bitcoin were bought for real money in the span of an hour or two.
The price run-up went from 00:00-02:00 UTC
UTC is Coordinated Universal Time, which is the standard that computers run at, and is roughly equivalent to London time without daylight savings. That meant that the run-up happened in the middle of the night in Europe, late evening in the Eastern U.S, early evening in the Western U.S, around noon in New Zealand, and in the early morning in China, Japan, and Australia.
Time zones can help give us clues as to who or what region might be behind the price rise.
The run-up was followed by a large drop
A large, but not total drop – Bitcoin hit almost $10,500 at 01:45 UTC, but had dropped back below $10K five minutes later. It’s continued to slowly decline, and now stands at $9050 twenty hours later. The decline has been orderly and steady, without major price movements, and has been on much less volume than the initial run-up.
Order book depth is well-supported
If you look at the order book depth at the present time, 20 hours after the move, it’s roughly symmetrical around the current price, with a slightly steeper V and a lot more quantity available than normal.
This indicates that there’s no particular pressure on the order book at this time, and that Bitcoin will likely trade in a tight range for the near future, with the worst of the declines behind us. The higher quantity than normal is consistent with a lot of arbitrage trading having recently happened; most arbitrage bots use limit orders rather than market ones to limit their risk if someone else places the order first, but they don’t all clear their orders immediately.
Tether printing on Bitfinex
One of the first explanations people assume when there’s a large jump upwards is “Market manipulation”. In particular, people frequently suggest that a large jump upwards might be Bitfinex printing more Tethers, which can then be used to buy Bitcoin on that exchange and pump the price higher.
This does not appear to be the case with this event. The volume was spread out across exchanges, and the initial price rise seems to coincide with volume on Binance rather than Bitfinex. Additionally, the last major Tether printing on-chain was on October 10, and had already hit the markets.
On October 25, Xi Jinping released a speech extolling the virtues of blockchain technology and suggesting that China should get behind it to further economic development. China is the world’s most popular country, and is known to be a major home of both Bitcoin miners and Bitcoin speculators. Could his speech have affected public sentiment and triggered this rally?
There’s some circumstantial evidence for this. The rally was broad-based, and initially affected exchanges formerly based in Hong Kong (Binance and Bitfinex) rather than U.S-based exchanges. And the timing suggests it may’ve been Asia-based, with the rally happening in the morning of East Asia.
But much of this circumstantial evidence falls apart on closer examination. The rally happened on Saturday morning, rather than on a weekday, so it wouldn’t be caused by people getting into work and seeing the news. And since the news broke on Friday, why did the rally not happen then? (There was a smaller Bitcoin rally then, from $7400 to about $8200, but the price then stabilized.) And if it were a real change in investor sentiment, we’d expect the rally to continue for multiple days, but it quickly lost steam within hours.
Overall, it’s unlikely that Xi’s announcement is the real explanation for this, although it could be part of the explanation.
A short squeeze
$324M in Bitcoin shorts were liquidated in the last hour of the rally. It was not the largest short squeeze in history, but it was pretty close. Could this have been the source of the rally.
It’s likely that this is part of the explanation. The last candle, the one that took Bitcoin from $9500 to $10500 in just a few minutes, coincides with peak liquidations on Bitmex. (Causality could also run the other way too, with a rapid increase in prices leading to more liquidations.) And then it dropped by just as much in the next 5 minutes, which is similar to what happens when there’s a temporary liquidity issue in the market. Overall, the sharpest peak in the graph is consistent with a short squeeze.
It’s not the full explanation, however. The timing is off: the rally began first, and then the short liquidations started. And the rally started off gradually and then accelerated, indicating that its initial cause was something other than liquidity issues.
Pumps on other cryptos
Another possibility is that some other cryptocurrency started the rally, and then it spread through either arbitrage or investor excitement to Bitcoin.
The two most likely candidates for this are Ethereum and Ripple, the #2 & #3 cryptocurrencies by market cap. Here’s a graph of their prices and volumes over the same time period as the rally:
This data doesn’t really support the hypothesis. ETH and XRP moved alongside Bitcoin, with nearly identical paths. This is common in the crypto world, because most altcoins have prices that are expressed in Bitcoin; when Bitcoin moves, they move too.
But the timing was delayed. With XRP you can see this clearly: it didn’t start rising until after Bitcoin was already on its way up. ETH is a little more unclear because the axes of the grid have it offset higher relative to Bitcoin, but it also didn’t start moving upwards until after Bitcoin’s jump. And in both cases, the absolute magnitude of the move was a lot less than for Bitcoin: ETH went from $180 to $188 (a jump of under 5%) and XRP from $0.30 to $0.31 (3%), but BTC went from $8600 to $10K, a jump of over 15%
It’s fair to say that this rally started and ended with Bitcoin, and there was little to no involvement of other altcoins.
Another common occurrence is that a single wealthy individual (a “whale”) buys a large amount of Bitcoin, and this sends the price soaring. On the charts, these usually look like a single tall candle followed by a long plateau, or sometimes a drop:
This also doesn’t fit the data. The graph above shows a single price jump over a time period of 5 minutes; by contrast, the one of this rally lasted for two hours. Also, the sheer amount of Bitcoin traded during this rally – almost $1B – is more than most whales would be able to manage.
A computer, acting on behalf of a fund
In the earlier article on market pitfalls, I explained that when a large investor tries to enter a position in a market with low liquidity, it creates slippage and they don’t get nearly as good a price as they expect. The way professional traders on Wall Street manage this is to slice their orders up and then send them to exchanges over a long period of time. Cryptocurrency investors largely do not do this.
There’s a significant amount of circumstantial evidence that this may be the case. For one, the rally started at 00:00 UTC (midnight Saturday morning by the computer’s clock), which is a very convenient time for a computer but a very inconvenient time for humans in most timezones. Two, it lasted over just about 2 hours, also a round number. Three, volume was split over most major exchanges, which could’ve been because of arbitragers but also could be because the program responsible for placing them explicitly split it up. Four, the dollar amounts involved are usually at the level where institutions would have specific software for this purpose.
The most likely explanation, after considering all these possibilities, is that this was the result of an institutional investor entering a large Bitcoin position (in the hundreds of millions of dollars) through automated trading methods. This institutional investor is probably used to the greater liquidity available in the public stock & bond markets, so they sliced their order over a couple of hours rather than the weeks-to-months that would be required to enter a position this large without moving the markets. The resulting price rise then caused a short squeeze which further intensified the rally, until other traders could respond and start selling.
Was the institutional buy related to China’s news? I don’t know, and it’s not really possible to unless you’re that institution. It seems plausible – it’s very typical of hedge funds to trade on geopolitics and enter an asset class because they expect political conditions will make that asset more attractive in the future. The timing is suggestive, as well.
It’s not the start of a new bull market. The price will likely stabilize in the low $9000s until the next major move happens. But it is a large institutional investor taking a big position in Bitcoin. We’re in the accumulation phase now, where larger institutions are seeking to buy into cryptocurrencies at the lowest prices possible.