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Bitcoin (BTC) has dropped almost 20% to $8,150 on Coinbase as the take-up of Bakkt bitcoin futures fails to impress. Bitcoin is currently priced at $8,305 .
After a period in which the leading digital currency seemed to have built up support at $10,000, the sharp pullback has caught many market participants by surprise.
Expectations of a successful re-testing of the year’s high at $13,800 against the background of an expected surge in Bakkt bitcoin futures, which launched on Monday, were dashed.
So what’s behind the latest bitcoin meltdown?
1) Bakkt underwhelms
As meteorologists will confirm, when hot meets cold you get a stormy downpour. It is a similarly stark contrast that has led to this latest tantrum in crypto markets – the expectation that institutional take-up would see a flood of pent-up demand direct funds into Bakkt futures has not materialised as yet.
The first day of trading saw a mere 72 contracts (Bakkt contract size is 1 BTC) change hands (a little over half a million dollars at current BTC prices). That appears to have caught out many on the wrong side of the price action holding long positions.
Commenting on the latest setback for bitcoin, Mati Greenspan from eToro sees it as a classic case of “buy the rumour, sell the news”.
2) BitMEX liquidations
If Bakkt disappointment is behind the selling, it is fair to say that the ferocity of the bear attack, which saw bitcoin at one stage fall $1,000 in 30 minutes, can be attributed to massive liquidations on the BitMEX exchange, the top global venue for unregulated crypto derivatives.
For example, in the past six hours long liquidations on BitMEX was running at $783 million compared to $16 million shorts (righthand bar chart immediately below).
If we look at activity over the past couple of days on BitMEX we see in the chart below that between 4.00pm and midnight (British Summer Time) yesterday sentiment deteriorated dramatically.
The shorts (red line) moved above the longs, indicating bearish sentiment. Readings below zero indicate closed positions, which in this case (-23 reading) illustrates the huge liquidation of longs (green line) clearly.
Add to that the magnifying effect of low trading volumes overall in the spot markets.
On 26 June bitcoin trading volume, as aggregated by coinmarketcap, which includes data from exchanges that stand accused of manipulating their volume data, was at a year high of $45 billion. That was the day bitcoin printed the intraday price of $13,796 as the leading crypto’s parabolic run-up peaked.
How Bakkt compares to CME’s bitcoin futures
So Bakkt is taking a lot of the blame at the moment but we should note that Chicago Mercantile Exchange (CME) and CBOE bitcoin futures also got off to a relatively slow start.
Although CBOE has given up on bitcoin, as seen in the shuttering of its futures product, its much larger cross-town competitor CME had volumes on launch day of 5,298 contracts a day (each CME contract is sized 5 BTC).
Hopes that the first physically settled bitcoin futures contract would lure customers from CME doesn’t seem to be happening just yet but to be honest it is early days.
Pantera Capital, which says it is one of “largest investors” in Bakkt, published a blog post heralding the launch of the physically settled futures, highlighting how they were an improvement over the CME cash-settled product.
“Many institutional investors have been waiting for institutional-grade custodians and exchange infrastructure to enter the space. The combination of ICE’s time-tested infrastructure and the security of Bakkt Warehouse’s custody product gives institutional investors the green light that they’ve been waiting for.”
After a lull in volatility, it is back with a bang. That is underlined in the widening spread between BitMEX and Coinbase spot prices.
Unrealistic expectations of impatient bitcoiners
Economist and trader Alex Kruger weighed in on Twitter:
Was Bakkt over-hyped? Debatable.
Argument for no:
– Bakkt gives institutions a venue to hold/trade physical bitcoin. It's a door. It's now open. Institutions will trickle in.
Argument for Yes:
– Market wants to see institutions walk through the door.
– Volume looks like a flop.
— Alex Krüger (@krugermacro) September 24, 2019
So perhaps it was always unrealistic to expect Bakkt to attract waves of institutional investors to turn up all at once.
“Volume looks like a flop,” says Krüger in his summation of case for the prosecution.
However, it is worth noting that volumes on the second day of trading are more double the first. If that curve establishes a trend line that continues on that trajectory, then the panic sellers could be getting it badly wrong.
So the counter argument that institutions are coming but that they “will trickle in” could be nearer to the truth of things. From this perspective what matters most is that the door has been opened for trusted and secure trading on an institutional-grade platform.
Ran Neuner, anchor of CNBC Africa’s Crypto Trader show, takes the “be patient” perspective.
People tweeting about BAKKT volume on day 1. Building a new financial system within the laws of an old financial system takes time. We should not discount how big this is;
-a physically settled BTC future
-run by a behemoth from the old financial system
-regulated in NYC/USA!
— Ran NeuNer (@cryptomanran) September 23, 2019
You won’t be too surprised to hear that Brian Kelly, founder and chief executive of New York-based digital asset investment firm BKCM shares that view.
But he raises two areas that haven’t be fully explored.
Kelly says it is a great “hedging mechanism” to tamp down on volatility and “in six to twelve months this is one of those things you point to and say when Bakkt launched futures that’s when the medium of exchange picked up.”
You can watch the full interview here:
— CNBC's Fast Money (@CNBCFastMoney) September 23, 2019
Another factor to bring into the mix is what’s been happening with altcoins.
For a brief moment it looked as though they were coming back from their collective near-death experience.
Unfortunately for investors in the likes of Bitcoin Cash and many other top alts, the rally was all too brief and the ongoing collapse in valuations has certainly added to downward pressure in the bitcoin markets as buyers became panic sellers in alts and that spilled over to some extent into BTC.
The see-saw pattern some were hoping to see re-emerge – a trading environment where the bitcoin price becomes more bearish and rangebound while alts advance – did not happen.
Instead, the altcoins sell-off has spilled over into the bitcoin market.
… and 4 more reasons behind the drop
Beyond Bakkt, the repeated failure to surmount the $13,800 mark has undoubtedly tired bulls.
We could also add in some other negatives such as:
- Libra pushback from regulators and politicians
- China central bank digital currency not imminent as previously reported
- Trade war has calmed a little
- Hong Kong protests calming too
Bitcoin to bounceback says eToro analyst
Simon Peters, a crypto analyst at global investment platform eToro, says a pullback was overdue since the peak at $13,800 (or $14,000 as Peters says) and sees a buying opportunity opening up at these prices.
(BTC/USD 1-day chart on Coinbase, courtesy TradingView)
“Nevertheless, now that you can trade bitcoin below $8,500, it could become an attractive proposition for investors who want to buy the dip. Fundamentals such as hashrate remains strong, and adoption of crypto is still moving forward at pace. With those conditions in mind, we could see the price rise back up to $10,000 within the space of the next month.”
Bear in mind that hashrate on the bitcoin network fell by around 20% on Monday despite the record activity levels (100 quintillion) seen up until then.
Nonetheless, bitcoin back at $10,000 could happen quite soon assuming support near $8,400 holds, perhaps helped along by institutional buyers who want to get in before the price goes to five figures again.
The prudent investor may wish to hold back to buy bitcoin and wait for signs of firmness at $8,400 before jumping in to accumulate more BTC.