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bitcoin It’s been a big jump this month — but probably not for the reasons you might think.
The world’s largest digital currency has rallied more than 12 percent since early June. On Wednesday, its price topped $30,000, reaching its highest level since April 14, according to Coin Metrics.
Market participants attributed the gains to news that U.S. asset management giant BlackRock has applied to set up a spot bitcoin exchange-traded fund that tracks the market price of the underlying asset.
While that may be part of the reason, this massive movement can be attributed to another factor besides the news flow about large institutions taking steps to embrace Bitcoin or other digital assets.
Liquidity is thin, participants are huge
The “depth of market” in cryptocurrencies has been very low this year. Market depth refers to the ability of a market to absorb larger buy and sell orders. When market depth is low and large players place orders to buy or sell digital currencies, prices can rise or fall significantly, even if the orders are not that large.
Market depth is a measure of market liquidity.
According to the data company pierBitcoin’s market depth has dropped 20% since the start of the year. Bitcoin has been one of the hardest-hit cryptocurrencies in terms of market depth, Kaiko said.
Bitcoin’s market depth within 1% of its mid-price range has fallen about 20% since the start of the year, according to data firm Kaiko.
pier
“Bitcoin’s recent surge in value has largely been driven by large transactions in less liquid markets,” Jamie Sly, head of research at CCData, told CNBC via email.
“Our analysis of market orders over 5 BTC shows a sharp increase in market buying, suggesting that large players are looking to gain exposure to digital assets.”
“When large orders are combined with thin books, markets are subject to greater volatility,” Sly added.
Part of the lack of liquidity is due to regulatory scrutiny of the crypto industry by U.S. authorities. The SEC has sued major exchanges such as Coinbase and Binance.
Low liquidity has been a feature of the cryptocurrency market throughout the year and is part of the reason bitcoin is up 80 percent so far this year.
retail traders are not back yet
Another notable feature of the current cryptocurrency market is the low trading volume on exchanges.
According to crypto data site CoinGecko, the daily trading volume of cryptocurrencies is currently around $24 billion.
That’s a marked drop from the more than $100 billion in total bitcoin trading volume during the peak of the cryptocurrency rally in 2021, when bitcoin rallied to an all-time high near $69,000.
Large cryptocurrency investors typically hope that an early surge in prices will be enough to lure retail investors back into the rally, ultimately pushing up the price of bitcoin and other digital currencies. But that didn’t happen.
Clara Medalie, director of research, said: “What’s notable about this rebound is that headline trade volumes are at multi-year lows, and we’ve only seen modest increases, and even then, well below our 1 levels seen from March to March,” Kaiko told CNBC.
“I think trading volume and price volatility are two of the most convincing indicators of market activity in cryptocurrencies. Both volatility and trading volume are at multi-year lows, and even rapid price increases are not enough to attract traders to participate.”
“This is not a market for the average customer”
During the last bitcoin cycle, market momentum was driven mostly by large institutional names such as investment banks Morgan Stanley arrive Goldman Sachs Set up a trading desk to expose customers to digital currencies.
However, it was only when retail traders started to take notice that the market really started to explode — in early 2021, people began to be tempted by NFTs (non-fungible tokens) and other phenomena of more speculative bets.
Later that year, the cryptocurrency market experienced a seismic rally, with the price of Bitcoin surging to unprecedented levels. According to CoinGecko, this has been accompanied by a surge in transaction volume, which climbed from $21.2 billion in early 2020 to $105.4 billion on November 9, 2021, when Bitcoin hit a new all-time high.
Today, trading volumes are nowhere near the levels seen at the peak of the cryptocurrency boom in 2021.
Carol Alexander, a finance professor at the University of Sussex, told CNBC: “Any news, if it’s good news, then professional traders will take a trade, if not, they won’t take a trade.”
“If there’s good news like a bitcoin ETF, they’re going to shoot up.”
After BlackRock filed its ETF application, Invesco and WisdomTree made similar moves, which also filed their own applications for bitcoin-related products.
“Both bitcoin and ether are manipulated in this way by professional traders. They don’t trade most of the time and wait until there is some good news,” Alexander said.
“Then they’ll sell at the top and the market will go sideways.”
In fact, Bitcoin has been trading in a range this year, and attempts to move higher have been thwarted.
Alexander believes bitcoin could trade between $25,000 and $30,000 for the rest of the summer.
However, she expects the cryptocurrency to climb to $50,000 by the end of the year, citing large-scale actions by larger market players trying to shore up the market with heavy buying.
“This is not a market for the average customer. It really isn’t,” she warned.
Has the market bottomed out?
Vijay Ayyar, vice president of international markets at Indian cryptocurrency exchange CoinDCX, told CNBC that he suspects that the latest rise in bitcoin prices was driven more by “long-term institutional buyers.”
Aiyar added that large funds and cryptocurrency-focused hedge funds are among the market players driving the move.
“I don’t think that’s going to be a big boost to the retail sector, which has been largely wiped out during the recent correction,” he said.
Several cryptocurrency industry insiders expressed hope that the market is close to a “bottom” period and can start to rise again.
The recent price action echoes activity in 2018, when bitcoin’s price and volume were suppressed for several months before starting to rise again the following year.
However, CCData’s Sly said it is “too early to tell if the worst is over for bitcoin”.
“The recent wave of interest from traditional financial institutions such as BlackRock, Citadel and Fidelity has injected renewed optimism into the market,” he said.
“Should the broader macro environment and the stock market continue to be favorable, Bitcoin has the potential to maintain its current positive price trajectory.”
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