Bitcoin’s rally is built on low trading volume. It increases the risk.
Bitcoin is up 37% since the start of the year, completely erasing losses following the demise of cryptocurrency trading platform FTX. But there is good reason why investors should not chase the upturn.
The big? Much of the cryptotoken’s large swings are based on such thin trading that it takes very little to cause prices to plummet again.
So far in January, about $542.6 billion in Bitcoin has traded on exchanges, according to CoinMarketCap. That’s 31% less volume than was traded in the same period a year ago, and about half the volume seen in the 25 days after the FTX began collapsing on November 6.
The result is that when people want to buy, fewer coins are available for sale. And unless things change, there will be fewer buyers when prices start to fall.
The implosion of the crypto industry that began last May has taken out several large traders and lenders who have helped facilitate trades not only in Bitcoin, but in more thinly traded “alt-coins,” such as Solana and Shiba Inu.
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Alameda Research, the hedge fund founded by former FTX CEO Sam Bankman-Fried, helped provide liquidity to tokens linked to the bankrupt exchange. Earlier this month, the lending unit of Genesis Global, a major crypto-institutional lender, filed for bankruptcy protection. Other lenders including Celsius Network, BlockFi and Voyager Digital have also filed for bankruptcy protection in the past year.
At the same time, retail traders have pulled back sharply from the market, wiping out volume on major platforms such as Coinbase Global (ticker: COIN). Nearly nine out of 10 Coinbase users who didn’t make crypto trades in December stayed on the sidelines in January, despite the rally, according to a survey by Mizuho analysts.
That’s a recipe for big price swings in the token market, and investors should take the boom with a grain of salt, says Evgeny Gaevoy, CEO of Wintermute, a crypto market maker and algorithmic trading firm.
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“Liquidity is significantly worse than a year ago,” says Gaevoy. “Pretty much across the board, with the market going up pretty significantly, the lack of liquidity is a pretty big contributor.”
Even the remaining crypto market makers have had to throttle their activity. Many such traders relied on funds borrowed from crypto lenders that have either gone bankrupt or pulled back sharply from the market, Gaevoy says.
Many traders are waiting to see if there will be more fallout from the bankruptcy of Genesis Global before re-entering the market, Gaevoy says, and the crypto rally will be easier to trust when the effects are clearer.
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“There is no strong narrative for a proper bull market to materialize yet,” says Gaevoy, who said he still believes in the long-term future of crypto. “In the short term, I’m not buying this bull market.”
Write to Joe Light at [email protected]
