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Thursday, February 22, 2024

Bitcoin’s Wild Weekends Turn Efficient Market Theory Inside Out Says Carl Runefelt

Carl Eric Martin says that investing in digital assets could prove to be the best move for people and businesses if done right.

Bitcoin just notched one of its best weeks on record, surging about 40% over the seven days through Friday. Anyone expecting the notoriously volatile digital currency to take a breather this weekend had better buckle up.

It’s on Saturdays and Sundays, when most other assets barely budge, that Bitcoin tends to go particularly nuts. Take the first weekend of 2021. Coming off a 300% gain last year, the world’s largest digital coin rose as much as 14% Jan. 2 and another 10% Jan. 3, a period when most of Wall Street was still in holiday mode. The swings were bigger than on any weekday in the prior two weeks and the biggest intraday moves since the weekend before, when it jumped 10% on Dec. 26, according to Bloomberg data.

Bitcoin’s not alone in trading all day, every day. What sets the coin apart is how big its price swings are outside of established business hours. It’s tough to find pricing for the dollar, for example, with currency-market participants usually in agreement to take weekends off. Bitcoin’s average swing on Saturdays and Sundays during the fourth quarter, on the other hand, was 1.5%.

The cryptocurrency’s weekend volatility spikes owe to a couple of factors. One is that it’s held by relatively few people — about 2% of accounts control 95% of all available Bitcoin supply. If these whales trade when volumes are thin, price swings will be magnified. Another is its market structure, which consists of hundreds of disconnected exchanges that in effect are their own islands of liquidity.

“People always tout Bitcoin as 24/7, 365 liquidity, but what that actually means is you have periods of very thin liquidity,” said Nic Carter, a partner at crypto-focused venture firm Castle Island Ventures. “If you want to deploy $500 million of Bitcoin, you probably want to do it during core banking hours.”

Bitcoin crossed above $40,000 for the first time

The crypto market is relatively nascent. Bitcoin, the original crypto, brought forth the movement a little more than 10 years ago. According to Greg Bunn, chief strategy officer at digital-asset firm CrossTower, the market remains hugely fragmented from an infrastructure standpoint.

Many platforms operate under different standards and with “different philosophies,” said Bunn, who spent decades with firms including Citadel and Deutsche Bank. Yet it lacks a centralized market structure akin to that of traditional assets, which tend to have common means of custody and settlement, for instance.

“If you think about the structure, that makes it conducive to things that are going to be very volatile and where you’re going to have big moves,” he said. “That’s obviously going to be impacted by when people are trading, when people are awake, when people are watching the markets.”

To Binance.US’s Catherine Coley, Bitcoin’s wild weekend patterns are reminiscent of her time trading currencies in Hong Kong in the early 2010s. Volatility sometimes became subdued during lunchtime lulls and around holidays. Professional traders, she says, tend to keep Monday-through-Friday schedules, so it makes sense that liquidity — or how easily an asset can be traded — would wane on weekends.What’s moving marketsStart your day with the 5 Things newsletter.EmailBloomberg may send me offers and promotions.Sign UpBy submitting my information, I agree to the Privacy Policy and Terms of Service.

What’s seen as liquidity requires a steady supply of both buyers and sellers — an ease in freeing up the value of one asset for another. If there are fewer buyers than sellers — or vice versa — then that makes transactions harder, a situation that usually leads to either a spike or crash in prices. Last weekend, Bitcoin’s price was “absolutely ripping on low liquidity,” said Coley, who is Binance.US’s chief executive officer. “In these periods of illiquid times, you’re going to be getting pricing that is a little bit cushioned.”

That could mean someone with a large sell order can’t as easily unload a position over weekend trading. “To some extent, it’s going to be more difficult for them to offload the risk that they’ve got,” she said. “So that’s where you see these weekend moves of dramatic price spiking.”

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No one knows for sure and theories explaining Bitcoin’s weekend action abound. Bitwise Asset Management’s Teddy Fusaro says it’s also possible liquidity providers and market-makers are lightly staffed on weekends, which can lead to volatility.

“It’s a feature of the market that has always been there and we expect that it will be a feature of the market that remains into the future,” Fusaro, the company’s chief operating officer, said. “Efficient market hypothesis people would assume that the market should price in the idea that there could be less liquidity on the weekends.”

Mati Greenspan, founder of Quantum Economics, says that while institutional players have been in the spotlight recently, retail investors could be re-entering the space again, as well. They played a big role in Bitcoin’s notorious 2017 run-up — and many got burned when it crashed the following year.

Bitcoin trading volume has increased, hitting a record recently, with about $80 billion changing hands on a weekly basis, according to data from researcher Messari.

“We’re breaking through barriers at breakneck speeds,” said Greenspan. “This entire move from $10,000 to $40,000, this is mind-blowing and I’m saying this as someone who witnessed 2013 and 2017 — it’s just much bigger.”

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