Cosima Capital: Thoughts of a Trader – Bitcoin – What Happened? Why? How?

Over the weekend Bitcoin saw a bear break, that although painful for bulls and bitcoin fans alike, wasn’t that surprising. The most important factors to look at when trading any asset is Price Action and Volume. Both Price Action and Volume are real time indicators. There are numerous other ways to determine whether or not an asset is a buy or a sell i.e. technical analysis and fundamental analysis, but nothing is as telling and important as price and volume.

If we look at the volume histogram for bitcoin we clearly see that the trading volume has been on a substantial decline. Chainlink’s recently released report claims bitcoin hodlers were selling in December in droves ultimately resulting in a 57% increase in trading/speculative bitcoin supply. At the same time the number of new FOMO buyers entering the space peaked, hence the $20,000 high. Since than bitcoin’s Price Action and Volume have been steadily declining.

The bulls would argue that sellers were exhausting and declining volume was normal. Maybe. But there is no denying that the bulls would have gladly welcomed above average volume along with their higher highs and higher low achievements. With less buyers comes less demand. Tax selling, capitulation, regulation; whatever the fundamental reason may be for the lack of upward movement doesn’t matter.

Enter BitMEX

The chart above is that of BitMEX and contrary to its competing exchanges, its volume has increased dramatically. The Bitcoin Mercantile Exchange, aka BitMEX, is a crypto-to-crypto exchange that has some pretty funky product offerings. Perhaps its best known for being the exchange that offers 100 times leverage. However, it can also be known as the exchange that broke bitcoin. More and more institutional (smart) money is entering the crypto markets, but they do so via OTC transactions. Cosima has facilitated more OTC transactions in the past month than most exchanges transact in an entire year. That leaves the retail (dumb money) left to pick at the scraps. As bitcoin becomes boring retail traders seek out their volatility fix the best way any trader knows how: LEVERAGE. At BitMEX, you deposit bitcoin and are able to buy, with up to 100 times leverage, perpetual swaps, and futures contracts. Fortunately, you cannot lose more bitcoin than you actually deposit on the exchange like traditional equity markets and margin calls, but losing all your bitcoin is very easy to do nonetheless. Furthermore, in times of slightly above average volatility BitMEX struggles to match trades resulting in numerous ‘Overloaded’ errors. Compounded by the system degradation are liquidations. Trading on BiMEX is a zero sum game, meaning for every buyer there has to be a seller. However, when ever there are more buyers than sellers the funding rate will fluctuate to attract traders to take the other side of the trade. Funding occurs every eight hours and normally fluctuates around a narrow .01%, longs to shorts. On bloody Sunday however there were way more longs than shorts. Instead of longs paying shorts .01% three times a day, funding spiked eightfold as seen below.

Since the smart money takes their trading demand off exchange, that leaves lots of retail money sloshing around looking for a quick buck.