Saturday, 3 June 2023

Crypto News

Bitcoin price falls below $29K, no surprise given volatility and liquidity metrics

Bitcoin price falls below $29K, no surprise given volatility and liquidity metrics

Key Takeaways

  • Bitcoin has softened fallen from $30,000 to close to $28,000
  • Our head of research looks into the data, arguing the move should not be a surprise
  • Bitcoin’s fixed supply and lack of dividends or earnings means price is entirely demand-driven
  • Thin liquidity in the Bitcoin market exaggerates every move, with 45% of stablecoins leaving exchanges in the last 4 months
  • Correlation with stocks remains high, with high UK inflation creating pause for thought
  • Market has also peeled back slightly on forecasts for interest rate cuts, and Bitcoin has followed

I have lost count of the number of times I’ve been asked “Why is Bitcoin going up?”, or “what is driving this Bitcoin sell-off?”. 

For many assets, it’s clear as day as to what is driving the price action over any given trading period. Earnings forecast missed by 10%? Hello, red candle. Warren Buffett announced a mass purchase of your stock? Buckle in; we’re heading north. 

For Bitcoin, it’s a little tougher. There are no dividends or dividend forecasts; Bitcoin pays no yield. Nor are there earnings. Additionally, the supply doesn’t waver, instead it follows a pre-determined schedule set by Satoshi Nakamoto in October 2008, governing it block by block in ten-minute intervals. 

With the supply set in stone and out of the picture, and the absence of any periodic yield/forecasts derived from dividends or earnings, this means that the Bitcoin price is all about demand. And that is very difficult to predict. Bitcoin gonna Bitcoin, is often about the best reasoning that can be given. 

But there are factors we can assess. One is liquidity, which I touched on in a recent deep dive as Bitcoin surged beyond $30,000 for the first time in ten months. Order book liquidity is as thin as it has been in a year, while overall capital has fled the crypto space at large. Take a look at the balance of stablecoins on exchanges:

That is 45% of the stablecoin balance taking the exit door in the last four months, the balance as low as it has been since October 2021. 

With Bitcoin already uber-volatile (VIX metric blows that of any “normal” asset out of the water), this amps up its propensity for violent moves even further. In simple terms, thinner liquidity means it takes less action to move the price. 

Why is the Bitcoin price currently falling?

So, it is often…

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