Global Courant
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Bitcoin has risen sharply this month – but not for reasons you might think.
The world’s largest digital currency is up more than 12% since early June. According to data from Coin Metrics, the price hit $30,000 on Wednesday, marking its highest level since April 14.
Market players have attributed the jump to news that US asset management giant BlackRock had filed for a spot bitcoin exchange-traded fund that tracks the market price of the underlying asset.
While that may be part of the reason, the outsized move can be attributed to another factor beyond the news flow around major institutions taking steps to embrace bitcoin or other digital assets.
Thin liquidity and big players
The “market depth” of crypto is at a very low level this year. Market depth refers to a market’s ability to take relatively large buy and sell orders. When the market depth is low and big players place orders to buy or sell digital coins, prices can rise or fall sharply, even if the orders are not that big.
Market depth is a measure of liquidity in a market.
According to data company Kaiko, bitcoin’s market depth has dropped 20% since the start of this year. Bitcoin is one of the hardest hit cryptocurrencies in terms of market depth, Kaiko said.
Bitcoin’s market depth with a range of 1% from its mid-price has dropped about 20% since the start of the year, according to data company Kaiko.
Kaiko
“Bitcoin’s recent appreciation is largely due to large transactions within a less liquid market,” Jamie Sly, head of research at CCData, told CNBC via email.
“Our analysis of market orders over 5 BTC reveals an aggressive increase in market buying, suggesting that major players are looking to gain exposure to digital assets.”
“When combining large orders with thin books, the market is subject to more volatile moves,” added Sly.
That lack of liquidity is due in part to the regulatory scrutiny of the crypto industry by US authorities. The Securities and Exchange Commission has sued major exchanges such as Coinbase and Binance.
Low liquidity, which has been a hallmark of the crypto market all year, is also partly behind bitcoin’s 80% year-to-date rally.
Retailers are not back yet
Another notable feature of the current crypto market is the low volumes traded on exchanges.
The daily trading volume in the cryptocurrency is currently around $24 billion, according to crypto data website CoinGecko.
That’s significantly less than the more than $100 billion in total bitcoin trading volume during the peak of the 2021 crypto rally, when bitcoin hit an all-time high of nearly $69,000.
Major crypto investors usually hope that an early rise in prices will be enough to entice private investors back into the rally, which will ultimately boost prices for bitcoin and other digital coins. But that didn’t happen.
“What is striking about this rally is that trading volumes are generally at multi-year lows and we are only seeing a slight increase, which even then is much lower than the levels we saw from January to March,” says Clara Medalie, director of research. at Kaiko, told CNBC.
“I think trading volumes and price volatility are two of the most telling indicators of crypto market activity. Both volatility and volumes are at multi-year lows, and even a rapid price increase is not enough to attract traders.”
‘It’s not a market for regular customers’
In the last bitcoin cycle, market momentum was largely driven by big, institutional names like investment banks Morgan Stanley Unpleasant Goldman Sachs set up trading desks to introduce their clients to the digital currency.
However, the market didn’t really start to break out until retailers took notice – in early 2021, people were seduced by the phenomenon that NFTs, or non-fungible tokens, and other more speculative bets were.
Later that year, the cryptocurrency market experienced a seismic rally, with bitcoin’s price zooming to unprecedented levels. That coincided with rising trading volume, which according to CoinGecko rose from $21.2 billion at the start of 2020 to $105.4 billion on November 9, 2021, when bitcoin hits its all-time high.
Today, trading volume is nowhere near where it was at the height of the crypto boom in 2021.
“Any news, if it’s good, the professional traders trade — otherwise they don’t trade,” Carol Alexander, a professor of finance at the University of Sussex, told CNBC.
“When a bit of good news comes along, like the bitcoin ETF, they fire up the guns.”
BlackRock’s ETF filing was followed by a similar move from Invesco and WisdomTree, who have also filed for their own respective bitcoin-related products.
“Bitcoin and ether are both manipulated in this way by the professional traders. They usually don’t trade, they wait for good news,” Alexander said.
“Then they sell the top and you have a sideways market.”
Indeed, bitcoin has traded within a range this year and attempts to burst significantly higher have been thwarted.
Alexander thinks bitcoin will likely trade in the $25,000 to $30,000 range for the rest of the summer.
However, she expects the cryptocurrency to rise to $50,000 by the end of the year, citing attempts by larger market players to prop up the market, with large purchases making outsized moves.
“It’s not a market for regular customers. It really isn’t,” she warned.
Has the market bottomed out?
Vijay Ayyar, vice president of international markets at Indian crypto exchange CoinDCX, told CNBC he suspects the latest surge in bitcoin’s price is driven more by “long-term institutional buyers.”
Major funds and crypto-focused hedge funds are among the market participants driving the action, Ayyar added.
“I don’t think this is a push for retail as retail was pretty washed out during the recent pullback,” he said.
Several crypto industry insiders have expressed hope that the market is approaching a “bottom point” where it can begin to rise again.
The recent price action mirrors activity in 2018, when both bitcoin’s price and volumes were subdued for several months before starting to rise again the following year.
However, CCData’s Sly said it’s “too early to say if the worst is over for bitcoin.”
“The recent wave of interest from traditional financial institutions, such as Blackrock, Citadel and Fidelity, is bringing renewed optimism to the market,” he said.
“If the broader macro environment and equity markets remain favorable, it is possible that bitcoin could maintain its current positive price trajectory.”
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