Bitcoin has just hit one of its best weeks on record, up about 40% over the seven days through Friday. Anyone who expects the notoriously volatile digital currency to take a breather this weekend should buckle up.
It’s on Saturdays and Sundays, when most other assets barely budge, that Bitcoin tends to go particularly crazy. Take the first weekend of 2021. Coming from one 300% gain last year, the world’s largest digital currency rose a whopping 14% on Jan. 2 and another 10% on Jan. 3 period when most of Wall Street was still in vacation mode. The swings were larger than on any weekday in the previous two weeks and the biggest intraday moves since the weekend before, when it jumped 10% on December 26, according to Bloomberg data.
Bitcoin isn’t alone in trading all day, every day. What distinguishes the currency is how big the price fluctuations are outside of fixed business hours. For example, it is difficult to find prices for the dollar, with the participants in the currency market usually agreeing to take a weekend off. By contrast, Bitcoin’s average swing on Saturday and Sunday during the fourth quarter was 1.5%.
The cryptocurrency’s weekend volatility spikes are due to a number of factors. One is that it is owned by relatively few people – About 2% of the accounts control 95% of all available Bitcoin inventory. If these whales trade when volumes are small, price fluctuations will increase. Another is the market structure, which consists of hundreds of disconnected exchanges that are in effect their own liquidity islands.
“People always think of Bitcoin as 24/7, 365 liquidity, but what that actually means is you have periods of very thin liquidity,” said Nic Carter, a partner at crypto-focused firm Castle Island Ventures. “If you want to bet $ 500 million in Bitcoin, you probably want to do it during the main banking hours.”
The crypto market is relatively burgeoning. Bitcoin, the original crypto, spawned the movement just over 10 years ago. According to Greg Bunn, Chief Strategy Officer at Digital Asset Company CrossTower, the market remains wildly fragmented from an infrastructure perspective.
Many platforms operate by different standards and with “different philosophies,” said Bunn, who spent decades with companies like Citadel and Deutsche Bank. However, there is no centralized market structure similar to that of traditional assets, which have, for example, common custody and settlement resources.
“When you think about the structure, that makes it conducive to things that are going to be very volatile and where you are going to make big movements,” he said. “Obviously that will be affected by when people are trading, when people are awake, when people are looking at the markets.”
According to Catherine Coley of Binance.US, Bitcoin’s wild weekend patterns are reminiscent her time trading currency in Hong Kong in early 2010. The volatility was sometimes dampened during lunch time breaks and around holidays. Professional traders, she says, tend to hold schedules Monday through Friday, so it makes sense that liquidity – or how easily an asset can be traded – would diminish over the weekend.
What is seen as liquidity requires a steady supply of both buyers and sellers – the ease with which the value of one asset can be released for another. When there are fewer buyers than sellers – or vice versa – it makes transactions more difficult, a situation that usually leads to an increase or crash in prices. Last weekend, the price of Bitcoin was “absolutely ripping through low liquidity,” said Coley, Binance.US CEO. “In these periods of illiquid times, you will get prices that are a bit subdued.”
That could mean that someone with a large sell order cannot clear a position as easily during weekend trading. “To some extent, it will be more difficult for them to eliminate the risk they have,” she said. “So there you see these weekend moves of dramatic price hikes.”
No one knows for sure and there are plenty of theories about Bitcoin’s weekend action. Teddy Fusaro of Bitwise Asset Management says it is also possible for liquidity providers and market makers to be lightly staffed on weekends, which can lead to volatility.
“It is a hallmark of the market that has always been there and we expect it to be a hallmark of the market that will continue in the future,” said Fusaro, the company’s chief operating officer. “People with an efficient market hypothesis would assume that the market should praise the idea that there could be less liquidity on the weekends.”
Mati Greenspan, founder of Quantum Economics, says that while institutional players have been in the spotlight recently, retail investors could also re-enter the space. They played a huge part in 2017’s infamous run-up to Bitcoin – and many were burned when it crashed the following year.
Bitcoin trading volume has surged, hitting a record high recently, with approximately $ 80 billion changing hands every week. according to data from researcher Messari.
“We’re breaking down barriers at breakneck speeds,” Greenspan said. ‘This whole moving from $ 10,000 to $ 40,000, this is amazing and I say this as someone who witnessed 2013 and 2017 – it’s just a lot bigger. “
– With the help of Kenneth Sexton and Lu Wang