Technical changes to crypto mining
The world’s most popular cryptocurrency, Bitcoin (BTC) rallied 15% in a delay in an unexpected spike in value this week taking it to the highest value since November 2018. It surged $1,000 to break through the $5,000 barrier. Since a series of shocks dumps, Bitcoin hasn’t seen $5,000 for months and the next technical step up is thought to be around $6,500. Before back in 2017, the rise was thought to be attributed to over-enthusiastic retail traders chasing a “get rich scheme” more intellectually defined as Metcalfe’s law.
Analysts and commentators across globally haven’t pinpointed one single reason for the sudden rise and sustained value, but the head of a London blockchain investment company believes the answer lies in a technical alteration to Bitcoin in the summer of 2020. Bitcoin is being lined up for a ‘halving’ in May 2020 – a phenomenon which will see cryptocurrency miners earning fewer bitcoins per block (a facet of the blockchain technology which underpins cryptocurrency). After the halving, miners will only recover 900 BTC per day rather than the current 1,800.
The effect? The demand for the daily bitcoin supply will rise significantly. George McDonaugh, CEO and co-founder of KR1 believed this was the key factor behind bitcoin’s recent uptrend. Speaking this week he said:
The move higher has been sustained for a couple of days now. Whilst it is still too early to claim that this is the advent of the next bull run in cryptocurrencies, there are a couple of factors that indicate there is substance to this move. First, is that the rally has cleared out a considerable resistance of sell orders just above the $4,200 level, which has led to a short squeeze on the bears, compounding the recent rally. Secondly, we are just over 400 days away from the next bitcoin halving at the end of May 2020.
History has shown that this event is followed by a rally in the price of bitcoin – it is still some way off, but investors look to be getting into position early in the case history repeats itself.
Large buy orders from aggressive bulls or unknown whale
At one-point Bitcoin had climbed 20% in Asian trading, breaking $5,000 however it had cooled by mid-afternoon in Europe and American trading hours to around $4,800 – its biggest one-day gain since April last year.
It’s well documented that Bitcoin surged to near $20,000 in late 2017, the peak of a bubble driven by retail investors. But last year prices collapsed by 80%, sometimes more and scammers we wiped out. Now retail investors have either sold, fled or are left with overvalued holdings in various coins. Now, trading dominated by smaller hedge funds and crypto-related firms.
This week’s gain was likely triggered by an order worth about $100 million spread across U.S.-based exchanges Coinbase and Kraken and Luxembourg’s Bitstamp, according to the chief executive of cryptocurrency firm BCB Group, Oliver von Landsberg-Sadie.
There has been a single order that has been algorithmically-managed across these three venues, of around 20,000 BTC, he said.
If you look at the volumes on each of those three exchanges – there were in-concert, synchronized, units of volume of around 7,000 BTC in an hour.
Algorithmic trading by bots
Bitcoin isn’t different than any other asset. Shorts positions can be liquidated, therefore short squeezes occur and more buyers jump on the hype and media fuel the fire on big drops and big rises.
According to a Bloomberg report, the popularity of algorithmic hedge funds in the crypto industry might have a lot to do with the surge in the price of cryptocurrencies.
Citing data from Crypto Fund Research, the report notes that algorithmic traders account for over 40% of crypto hedge funds launched since September 2018.
Further, according to Oliver von Landsberg-Sadie, the CEO of London-based crypto firm BCB Group, the volatile bitcoin price swing of more than 20% was “likely triggered by automated software set up to execute a $100 million trade across three exchanges.” As mentioned above.
Interestingly, while crypto hedge funds nearly lost 72% of their wealth in 2018 (this is hard to qualify), some algo-based funds report that they made monthly profits in the range of 3 to 10% throughout the year.
On the surface, it might seem that algorithms are making the process of trading more open and transparent but in reality, an increase in the number of such traders, however, can raise the risk for market manipulation.
Spoof trading works very simply by traders flooding the market with fake orders to trick innocent retail investors into holding market positions as per their benefits.
Unfounded rumours have stated that before Brexit, investors are converting their pounds to Bitcoin as a “safe haven” and that may have caused the spike. This is unfounded as of yet and part of the rumour mill but Bloomberg also reported that the number of active Bitcoin wallets increased in the two weeks leading up to the rally which may have led to the surge.
As a rule, Cryptocurrency markets had until this week seen a period of relative calm through the year, with bitcoin trading around $3,300 and $4,200. Large institutional investors have, as a rule, stayed out the market and not progressed initiatives pledged in 2018. Generally, concern over security breaches and regulatory uncertainty were cited as reasons for the lack of mainstream enthusiasm in cryptocurrency. This comes as this last month, Cboe Global Markets – which offered the first U.S. bitcoin futures contracts in 2017 – said it would no longer offer bitcoin futures contracts. CME Group Inc continues to list its futures product, which launched soon after Cboe.