Bitcoin Fundamentals Are a Cause For Concern

Market Analysis Mar 28, 2021

Its been a little while since we've taken a look at the price of Bitcoin, but it appears there's no time like the present; especially in light of some of the concerning technicals (for bulls) that we're going to take a look at in this piece.

Bitcoin Overall Trend Since the Start of the Bull

Let's recap 2020 for a second.

In terms of price action, we saw:

  1. Bitcoin post a slow, steady gain from the bottom we experienced in late 2018 (circa $3.3k)
  2. From the beginning of January 2020 to around March, Bitcoin continued about its same pace with some notable acceleration in February.
  3. March 2020 comes and the world teeters on the brink of complete collapse. Everything cancelled, hospitals & emergency rooms packed to the brim, world leaders convening with the World Health Organization on how to deal with the burgeoning global pandemic (that nobody was ready for) and panic was everywhere. Bitcoin suffered a loss of >50% of its total value in the space of one day. Terror ensued.
  4. The Federal Reserve basically goes nuclear and essentially announces that it would be willing to dump an unlimited amount of money into the markets to quell the sell-offs. Interest rates were dropped to zero along with the reserve requirements (other federal reserves followed suit in their respective nations as well). With the permanent sell wall in place, the markets recovered.
  5. Bitcoin increased steadily throughout the year, but there was nothing particularly noteworthy about the pace of Bitcoin's price increase until the beginning of October. Very specifically, the catalyst was Twitter's announcement that they had bought >$50 million worth of Bitcoin

Below is the tweet from Jack Dorsey making said announcement:

Below, we can see that Bitcoin was trading at a price of $10.8k.

Curiously, if we track Bitcoin's overall price appreciation from the dump in March 2020 to that very point in October, we'll see that the price had only increased by approx. 126% over the 7-month span (we're not looking at the intraday low for Bitcoin during that dump because it quickly consolidated back up above $5k the following day, resulting in the steepest losses showing up as a wick on the daily candle):

What's really interesting to note is that Bitcoin had a much faster rate of great at the beginning of that year:

In the chart above, we can see that Bitcoin was up well over 50% in just a little over a month before it experienced a violent sell off along with the rest of global equities.

Quick Look at Bitcoin's Price Action From the Time of Dorsey's Tweet to Present

The announcement that Square had purchased >$50 million worth of Bitcoin came on October 8th, 2021.

Below is a chart showing the price action since:

If Twitter's timing seems absolutely unbelievable, that's because it is. Either that or Jack Dorsey and all of the traders on the futures market that morning got extremely lucky - because there were bids placed as high as $20,000 on the morning of October 8th (almost unbelievably so)

CoinDesk Observed the Out of Place Activity on the Futures Markets as Well

It appears that CoinDesk should have placed one of their narrative-shifters on this one, because this writer was 'on the money' (no pun intended), with their dissection of the Bitcoin Futures activity in the early hours of October 8th, 2020.

Here is an archived link to that CoinDesk article: https://www.coindesk.com/bitcoin-options-volume-on-cme-jumps-300-as-traders-take-bullish-bets

Below is an official tweet from Skew made that morning:

Below are screenshots from a CoinDesk article published earlier that morning (6 a.m. EST), noting the inexplicable, meteoric increase in futures volume on the CME:

Specifically, the increase was in call options (longs):

Things get even stranger when we take a look at futures activity from the prior day (October 7th, 2020).

Overwhelming Number of Puts Made on October 7th, 2020

As seen in the tweet below, 75% of of option flows on Bitcoin were puts back in October 7th, 2020:

However, if we look closer at those numbers, we can see that half of that volume came from put calls that were being sold.

Selling a put option is a bull strategy (versus purchasing one).

Investopedia will explain for us below:

From the outside looking in, one would imagine that such an extraordinary number of put calls were being purchased with the intentions of hedging against a major anticipated increase in the price of Bitcoin.

However, if we look at other relevant market metrics for Bitcoin at the time, it becomes clear to us that there were no logical reasons for traders to have been so bullish on Bitcoin that they felt they needed to hedge their positions (significantly)

Additionally, the realized volatility for Bitcoin  had hit a 3-year low (again, on October 7th, 2020).

Skew even goes as far as to make it clear on their page that the Bitcoin price was unaffected by Twitter's purchase of Bitcoin.

As the tweet suggests, Twitter purchased the Bitcoin on several exchanges ($50 million aggregate), using the TWAP - which is a tool  that allows firms and traders to gauge the market 'benchmark' price in relation to its actual price.

Indicators like the TWAP and MVWAP are useful when attempting to obtain assets at the most effective price without impacting / influencing the price of the asset on the open markets.

However, in this case, if we look deeper into Skew's tweets, it appears that they almost 'exonerate' Twitter entirely by publishing information that appears to corroborate the theory that they had no hand in any wrongdoing / backroom collusion.

Digging into Those Call Options

Notably, in the tweet it is said that there were 14k, 16k, 18k and 20k call spreads "in good size" in good size Dec20 and Mar21.

There is significant meaning in what they wrote above. So much so to where a quick refresher on how call options work from Investopedia:

Below is the definition of a 'call spread' from Investopedia:

Since this concept of a 'call spread' is really important to understand in order to grasp how out of place those call options were, Investopedia's additional explanation is also included below (highly recommended that you read through them if you're not 100% confident that you understand how call options work):

The 'real-world example' given by Investopedia is also included below:

Limited Additional Information Available

What was published above is the extent of the information that we know about the Bitcoin Futures market from that day.

But there are a ton of takeaways that we can gleam from the information above.

Namely that:

  1. There is and was extensive manipulation on the Bitcoin Futures markets.
  2. Based on additional research published by Librehash covering the activity of traders during the March 2020 market crash, we know that traders will leverage the spot markets (i.e., the underlying market on which the NAV is based), in an effort to influence the premium / discount on a given Bitcoin Futures' contract. To state that there simply isn't that much money / volume in the Futures market to do such a thing would be ignorant, at best.
  3. Quietly, many of the larger firms and VCs that have entered the space are becoming over-leveraged

There's more information that we're going to look at here, but this should at least get our minds flowing on what may really be going on in the blockchain space.

Tags

cryptomedication

Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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