I guess I’m old school. When markets close on a Friday afternoon in North America, I’m wrapping up my week. I often wished I could scoot out just after the bell rang, like Fred Flintstone sliding down the dinosaur tail, but I was responsible for deciding the fate of our special exercises[i]. We made markets in thousands of options in the US and Canada, so the special exercise process could prove time-consuming. While I envied those traders who could shut their books and leave for the weekend, I understood the importance of the exercise process to our firm’s bottom line and gave it full consideration, often until the OCC’s cutoff time. That said, no matter when I was done, I was done. I could largely stop worrying about markets until Sunday night when Asia opened for the week.
Then bitcoin came along. One of the features of this cryptocurrency is that it can be traded 7 days a week, 24 hours a day. Even foreign currency trading — perhaps the most liquid and otherwise continuous market there is — takes a break over the weekend. The traders who man the dealing desks at major banks like to go home for the weekend as well. Apparently the crypto markets never saw the need for that luxury, and they stay open constantly. Is it any surprise then that weekend trading has brought us some of the wildest moves in bitcoin?
I wrote this after a 20% weekend decline early this year, comparing bitcoin trading on the weekend to video gaming.
On Sunday morning, I received an alert on my phone that bitcoin was trading 15% lower. As much as I wished I could simply ignore it and go about my day, I couldn’t resist clicking through. The reasons were murky – something about rumors regarding Treasury crackdowns on cryptocurrencies – but I would argue that we don’t need a great reason for an inflated market to hit an air pocket on a day when liquidity is muted. A journalist reached out to me yesterday afternoon for reasons for the decline, and here is what I answered:
1. The last leg of the rally was unfounded. Bitcoin went up to fresh highs because of excitement ahead of the Coinbase (COIN) listing. There was no fundamental reason why listing COIN would be good for crypto (maybe more acceptance, but that’s a stretch), and when there was no follow through on COIN, there was none in Bitcoin. There had to be some disappointment.
2. Supposedly this is a delayed reaction to [new Securities and Exchange Commission Chair Gary] Gensler’s confirmation. He’s promised more regulation- though the rumor mill seems to say it’s the Treasury not the SEC. But the crypto crowd isn’t always scrupulously fact-checking.
3. Everything is worse on a weekend. I don’t know if there were stops to be run, but if so it’s a really opportune time to do it. That may be why we’re off the lows as Asia opens for business.
I still stand by these theories this morning. It didn’t take much to move bitcoin over the weekend, but the fact that we saw only minor buying on the dip means that the weekend move seems to have triggered at least a short term change in sentiment. Much of the trading seems technical in nature, as evident from the following graph:
Six Month Chart of Bitcoin with 10, 30, 50, 100 Day Moving Averages and MACDs
My theory of how the move metastasized is this: in light trading, the 10 day moving average (yellow) was pierced, and then shortly thereafter the 30 day (green) was pierced as well. In and of themselves, this should not have been a big deal. We can see that bitcoin has traded around one or the other of these averages for most of the past few months without incident. The problem arose when the selling drove the price through the 50 day average (orange). That has acted as support for the spectacular uptrend throughout this year. A move through a major trend line can indeed indicate a significant change in sentiment. Yesterday’s selloff ceased around a previous support level in the $52,000 range, but we see today that any bounce off the lows was largely arrested around that 50 day line. It appears that prior support is now offering at least short-term resistance.
There is a problem with using long-term moving averages for support in a product that has risen sharply. Those longer-term averages can be quite a way below the current trading price of the instrument in question. When bitcoin topped out near $65,000, the 50 day moving average was about $10,000, or 15% lower. That is why big up moves are often punctuated by significant declines, and that those declines are frequently not sufficient to break the uptrend. The 20% weekend decline that I wrote about in January failed to bring bitcoin even to its 30 day moving average. Last weekend’s move, while less dramatic, may actually reveal something different. For the first time in months, we have seen a longer-term trend line being broken. That may prove to be significant, and bring the $50,000 level or 100 day moving average of about $49,000 into play.
Of course, last weekend’s move may simply be a blip in the otherwise stellar advance in bitcoin. Long-term trends usually take a long time to evolve. Stay tuned. But I would offer my wife’s explanation, one that she offered during my conversation with the journalist: “on Wednesday, my financially illiterate trainer finally heard about Bitcoin and recommend that I should invest in it because she heard was impossible to lose money doing so.” That was roughly the top of bitcoin, at least for now. A similar recommendation from a shoeshine boy allowed Joseph Kennedy to largely avoid the stock market crash of 1929. Just saying…
[i] If you are trading options, you need to be aware of special exercise considerations. The Options Clearing Corporation (OCC) will automatically exercise an expiring option that is in the money by $0.01 or more. If a stock or ETF moves up or down through a strike in the after-market, the option holder has the opportunity to offer contrary instructions. That can include lapsing a long call on a stock that fell below the strike or exercising a long put in the same situation. Also, since OCC will lapse all at-money options if the underlying stock closes exactly on the strike (aka “pin”), the holder would want to decide whether to provide affirmative instructions to exercise an expiring put or call.
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