Bitcoin has just recorded one of the best weeks on record, growing by about 40% in the seven days to Friday. Anyone who expects the notoriously volatile digital currency to take a breather this weekend would be better off shutting down.
On Saturdays and Sundays, when most other assets are barely multiplying, Bitcoin tends to go particularly crazy. Take the first weekend of 2021. Coming from a 300% gain last year, the largest digital currency in the world rose by up to 14% on January 2 and another 10% on January 3, a period when most of Wall Street was still in vacation mode. Balances were higher than in any other week in the past two weeks and the biggest intraday moves since the previous weekend, when it jumped 10% on December 26, according to Date Bloomberg.
Bitcoin is not the only one that trades all day, every day. What differentiates the currency is how large its price variations are outside the set hours. It is difficult to find prices for the dollar, for example, with participants in the foreign exchange market usually agree to take holidays on the weekend. On the other hand, the average fluctuation of Bitcoin on Saturdays and Sundays in the fourth quarter was 1.5%.
The increase in the volatility of the cryptocurrency weekend is due to several factors. One is that it is owned by relatively few people – about 2% of accounts control 95% of all available Bitcoin offerings. If these whales trade when the volumes are thin, price fluctuations will be increased. Another is its market structure, which consists of hundreds of disconnected exchanges that are, in fact, their own islands of liquidity.
“People always claim Bitcoin as 24/7, 365 liquidity, but what it really means is that you have very thin liquidity periods,” said Nic Carter, a partner at cryptocurrency investment firm Castle Island Ventures. “If you want to implement $ 500 million worth of Bitcoin, you probably want to do it during basic banking hours.”
The cryptographic market is relatively nascent. Bitcoin, the original crypto, gave birth to the movement a little over 10 years ago. According to Greg Bunn, strategy director at digital asset firm CrossTower, the market remains highly fragmented in terms of infrastructure.
Many platforms operate according to different standards and “different philosophies,” said Bunn, who has spent decades with companies such as 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 conducive to things that will be very volatile and where you will have big moves,” he said. “Obviously, this will be affected by when people trade, when people are awake, when people are watching markets.”
For Catherine Coley of Binance.US, Bitcoin’s wild weekend models are reminiscent of time to trade currencies in Hong Kong in the early 2010. Volatility sometimes became low during lunch breaks and around the holidays. Professional traders, she says, tend to keep their programs Monday through Friday, so it makes sense for liquidity – or how easily an asset can be traded – to fall over the weekend.
What is seen as liquidity requires a constant supply of both buyers and sellers – an ease in releasing the value of one asset to another. If there are fewer buyers than sellers – or vice versa – then this makes transactions more difficult, which usually leads to either a rise in prices or a fall in prices. Last weekend, the price of Bitcoin “absolutely knocked down low liquidity,” said Coley, who is the executive director of Binance.US. “During these illiquid periods of time, you will get slightly depreciated prices.”
This could mean that someone with a large sales order cannot easily download a position in weekend trading. “To some extent, it will be more difficult for them to unleash the risk they have,” she said. “So that’s where you see these dramatic weekend price increases.”
No one knows for sure and the theories that explain the weekend action of Bitcoin abound. Teddy Fusaro, Bitwise Asset Management, says it is possible that liquidity providers and market makers will have light staff over the weekend, which can lead to volatility.
“It is a feature of the market that has always existed there and we expect it to be a feature of the market that remains in the future,” said Fusaro, the company’s chief operating officer. “Efficient marketers would assume that the market should appreciate the idea that there could be less liquidity over the weekend.”
Mati Greenspan, the founder Quantum Economics says that although institutional players have been in the spotlight recently, retail investors could re-enter the space as well. They played an important role in the notorious Bitcoin predecessor of 2017 – and many burned when it collapsed the following year.
Bitcoin trading volume has risen to a recent record, with about $ 80 billion changing hands weekly, according to researcher Messari.
“We’re crossing barriers at breakneck speed,” Greenspan said. “Whole goes from $ 10,000 to $ 40,000, this is amazing and I say this as someone who witnessed 2013 and 2017 – it’s much bigger. “
– With the assistance of Kenneth Sexton and Lu Wang