Bitcoin has just recorded one of its best weeks ever recorded, increasing by about 40% in the seven days through Friday. Anyone who expects the notoriously volatile digital currency to take a break this weekend is better off tightening their belts.
It is on Saturdays and Sundays, when most other assets barely move, that Bitcoin tends to get particularly crazy. Take the first weekend of 2021. Leaving a 300% gain last year, the world’s largest digital currency rose by 14% on January 2 and another 10% on January 3, the a period when most of Wall Street was still in holiday mode. The swings were greater than on any day of the week in the previous two weeks and the biggest intraday movements since the previous weekend, when it rose 10% on December 26, according to Bloomberg Contact info.
Bitcoin is not alone in trading all day, every day. What differentiates the currency is the size of the price fluctuations outside the established business hours. It is difficult to find prices for the dollar, for example, with foreign exchange market participants generally agreeing to take weekends off. Bitcoin’s average fluctuation on Saturdays and Sundays during the fourth quarter, on the other hand, was 1.5%.
The cryptocurrency’s weekend volatility spikes are due to a few factors. One is that it is maintained by relatively few people – about 2% of accounts control 95% of all available Bitcoin supply. If these whales trade when volumes are scarce, price fluctuations will be increased. Another is its market structure, which consists of hundreds of disconnected exchanges that are actually their own islands of liquidity.
“People always praise Bitcoin as 24/7, 365 liquidity, but what it really means is that you have periods of very fine liquidity,” said Nic Carter, partner at Castle Island Ventures, a venture capital firm focused on cryptography. “If you want to deploy $ 500 million in Bitcoin, you probably want to do it during central bank hours.”
The crypto market is relatively nascent. Bitcoin, the original cryptography, gave rise to the movement just over 10 years ago. According to Greg Bunn, chief strategy officer at digital assets company CrossTower, the market remains extremely fragmented from an infrastructure standpoint.
Many platforms operate under different standards and with “different philosophies,” said Bunn, who spent decades with companies like Citadel and Deutsche Bank. However, it lacks a centralized market structure similar to that of traditional assets, which tend to have common means of custody and settlement, for example.
“If you think about the structure, it makes it suitable for things that are going to be very volatile and where you’re going to have big movements,” he said. “This will obviously have an impact when people are trading, when people are awake, when people are watching the markets.”
For Catherine Coley of Binance.US, the wild patterns of the Bitcoin weekend are reminiscent of his time trading currencies in Hong Kong in the early 2010s. Volatility sometimes decreased during the lunchtime lulls and around the holidays. Professional traders, she says, tend to follow schedules Monday through Friday, so it makes sense that liquidity – or the ease with which an asset can be traded – decreases on weekends.
What is seen as liquidity requires a constant supply of buyers and sellers – a facility to release the value of one asset to another. If there are fewer buyers than sellers – or vice versa – this makes transactions more difficult, a situation that usually leads to a spike or drop in prices. Last weekend, Bitcoin’s price was “falling completely with low liquidity,” said Coley, who is the CEO of Binance.US. “In these periods of lack of liquidity, you will get prices that are a little dampened.”
This may mean that someone with a large sales order cannot unload a position as easily during weekend negotiations. “To some extent, it will be more difficult for them to get rid of the risk they are running,” she said. “So this is where you see these weekend movements of dramatic price spikes.”
No one knows for sure and the theories that explain Bitcoin’s action over the weekend abound. Teddy Fusaro, of Bitwise Asset Management, says it is also possible that liquidity providers and market makers may have few employees on weekends, which can lead to volatility.
“It is a feature of the market that has always existed and we hope it will be a feature of the market that will remain in the future,” said Fusaro, director of operations for the company. “People with efficient market assumptions assume that the market should price the idea that there could be less liquidity on weekends.”
Mati Greenspan, founder of Quantum Economics says that while institutional participants have been in the spotlight recently, retail investors may also be entering the market again. They played a big role in the notorious Bitcoin race in 2017 – and many were burned when it broke the following year.
Bitcoin trading volume increased, breaking a record recently, with around $ 80 billion changing hands weekly, according to data from researcher Messari.
“We are breaking barriers at breakneck speeds,” said Greenspan. “This whole move from $ 10,000 to $ 40,000, that’s mind-boggling and I’m saying this as someone who witnessed 2013 and 2017 – it’s a lot bigger. “
– With the help of Kenneth Sexton and Lu Wang